The Profitability in the FTSE 100 Index: A New Markov Chain Approach

Flavio Ivo Riedlinger () and João Nicolau
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Flavio Ivo Riedlinger: Universidade de Lisboa and CEMAPRE ISEG
João Nicolau: Universidade de Lisboa and CEMAPRE ISEG

Asia-Pacific Financial Markets, 2020, vol. 27, issue 1, No 3, 81 pages

Abstract: Abstract In this paper, we propose a new method to predict stock market trends based on the multivariate Markov chain (MMC) methodology. Our approach consists of forecasting the one-period ahead FTSE 100 Index behavior, using the MTD-Probit model. The MTD-Probit model is a new approach for estimating MMC, based on multiple categorical data sequences that can be used to forecast financial markets. In this context, we propose a simple trading strategy and analyze its profitability using the White “Reality Check” and the Hansen SPA data snooping bias tests. Our empirical results suggest that the MTD-Probit model applied to the FTSE 100 Index cannot significantly out-perform the buy-and-hold benchmark after data-snooping is controlled.

Keywords: Multivariate Markov chains; Algorithmic trading; Data-snooping test; MTD-Probit; FTSE 100 (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1007/s10690-019-09282-4

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