Predictability of Equity Models

Pedro Valls Pereira and Rodrigo Chicaroli

MPRA Paper from University Library of Munich, Germany

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

Keywords: predictability; variance ratio profile; Monte Carlo simulation; reality check; bootstrap; technical analysis (search for similar items in EconPapers)
JEL-codes: C15 G10 (search for similar items in EconPapers)
Date: 2009-01
New Economics Papers: this item is included in nep-cmp
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Related works:
Working Paper: Predictability of equity models (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:10955

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