J

www.bjll.org/index.php/jpm/article/download/419/450

The part that I am having a problem with is the 2-step model. Can someone here explain more clearly the mechanics of this model? In particular, I have these questions:

1. I understand each fundamental and market variable is weighted, but how are these variables scaled? In "raw" form or in z-score form?

2. I'm very confused about the "explosion" process. In a practical sense, how do I select the best horse from the explosion process? It all seems unclear to me.

3. Would someone be able to walk me through the process of calculating a "winner" in a made-up numerical example?

I've been trying to work with this model for weeks, but my own sample is yielding consistently negative returns using this process. Thanks!