Predictability of equity models

Pedro Valls Pereira

No 176, Textos para discussão from FGV EESP - Escola de Economia de São Paulo, Fundação Getulio Vargas (Brazil)

Abstract: In this study, we verify the existence of predictability in the Brazilian equity market. Unlike other studies in the same sense, which evaluate original series for each stock, we evaluate synthetic series created on the basis of linear models of stocks. Following Burgess (1999), we use the 'stepwise regression' model for the formation of models of each stock. We then use the variance ratio profile together with a Monte Carlo simulation for the selection of models with potential predictability. Unlike Burgess (1999), we carry out White’s Reality Check (2000) in order to verify the existence of positive returns for the period outside the sample. We use the strategies proposed by Sullivan, Timmermann & White (1999) and Hsu & Kuan (2005) amounting to 26,410 simulated strategies. Finally, using the bootstrap methodology, with 1,000 simulations, we find strong evidence of predictability in the models, including transaction costs.

Date: 2009-01-27
New Economics Papers: this item is included in nep-cmp
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Related works:
Journal Article: Predictability of Equity Models (2015)
Working Paper: Predictability of Equity Models (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:fgv:eesptd:176

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