Recognizing and Forecasting the Sign of Financial Local Trends using Hidden Markov Models
E. Grosso and
Edoardo Otranto ()
Working Paper CRENoS from Centre for North South Economic Research, University of Cagliari and Sassari, Sardinia
The problem of forecasting financial time series has received great attention in the past, from both Econometrics and Pattern Recognition researchers. In this context, most of the efforts were spent to represent and model the volatility of the financial indicators in long time series. In this paper a different problem is faced, the prediction of increases and decreases in short (local) financial trends. This problem, poorly considered by the researchers, needs specific models, able to capture the movement in the short time and the asymmetries between increase and decrease periods. The methodology presented in this paper explicitly considers both aspects, encoding the financial returns in binary values (representing the signs of the returns), which are subsequently modelled using two separate Hidden Markov models, one for increases and one for decreases, respectively. The approach has been tested with different experiments with the Dow Jones index and other shares of the same market of different risk, with encouraging results.
Keywords: markov models; asymmetries; binary data; short-time forecasts (search for similar items in EconPapers)
JEL-codes: C02 C63 G11 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ecm, nep-ets, nep-for and nep-ore
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Persistent link: https://EconPapers.repec.org/RePEc:cns:cnscwp:200803
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