Forecasting the direction of the US stock market with dynamic binary probit models
AbstractSeveral empirical studies have documented that the signs of excess stock returns are, to some extent, predictable. In this paper, we consider the predictive ability of the binary dependent dynamic probit model in predicting the direction of monthly excess stock returns. The recession forecast obtained from the model for a binary recession indicator appears to be the most useful predictive variable, and once it is employed, the sign of the excess return is predictable in-sample. The new dynamic “error correction” probit model proposed in the paper yields better out-of-sample sign forecasts, with the resulting average trading returns being higher than those of either the buy-and-hold strategy or trading rules based on ARMAX models.
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Bibliographic InfoArticle provided by Elsevier in its journal International Journal of Forecasting.
Volume (Year): 27 (2011)
Issue (Month): 2 ()
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Web page: http://www.elsevier.com/locate/ijforecast
Dynamic probit model; Directional predictability; Stock return; Recession forecast; Leading indicators;
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- Thomas Bury, 2013. "Predicting trend reversals using market instantaneous state," Papers 1310.8169, arXiv.org, revised Mar 2014.
- Chevapatrakul, Thanaset, 2013. "Return sign forecasts based on conditional risk: Evidence from the UK stock market index," Journal of Banking & Finance, Elsevier, vol. 37(7), pages 2342-2353.
- Nyberg, Henri, 2013. "Predicting bear and bull stock markets with dynamic binary time series models," Journal of Banking & Finance, Elsevier, vol. 37(9), pages 3351-3363.
- Zhang, Xinyu & Lu, Zudi & Zou, Guohua, 2013. "Adaptively combined forecasting for discrete response time series," Journal of Econometrics, Elsevier, vol. 176(1), pages 80-91.
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