Predictability of Equity Models

Rodrigo Chicaroli

doi:10.1002/for.2343

Predictability of Equity Models

2015-05-05

2

OA

AI

R

Rodrigo Chicaroli

P

Pedro L. Valls Pereira *

DOI：10.1002/for.2343

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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 the approach of Burgess (Computational Finance, 1999; 99, 297-312), 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 using data from 1 April 1999 to 30 December 2003. Unlike the approach of Burgess, we carry out White's Reality Check (Econometrica, 2000; 68, 1097-1126) in order to verify the existence of positive returns for the period outside the sample from 2 January 2004 to 28 August 2007. We use the strategies proposed by Sullivan, Timmermann and White (Journal of Finance, 1999; 54, 1647-1691) and Hsu and Kuan (Journal of Financial Econometrics, 2005; 3, 606-628) amounting to 26,410 simulated strategies. Finally, using the bootstrap methodology, with 1000 simulations, we find strong evidence of predictability in the models, including transaction costs. Copyright (c) 2015John Wiley & Sons, Ltd.

Keyword:

predictability

variance ratio profile

Monte Carlo simulation

reality check

bootstrap

technical analysis

Predictability of Equity Models

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