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Are Spanish Ibex35 stock future index returns forecasted with non-linear models?

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Author Info
Jorge V. Pérez-Rodríguez
Salvador Torra
Julian Andrada-Félix

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Abstract

This study employs different nonlinear models (smooth transition autoregressive models (STAR), artificial neural networks (ANN) and nearest neighbours (NN)) to study the predictability of one-step-ahead forecast returns for the Ibex35 stock future index at a one year forecast horizon. It is found that the STAR, ANN and NN models beat the random walk (RW) and linear autoregressive (AR) models in out-of-sample forecast statistical accuracy, and also when economic criteria were used in a simple trading strategy including the impact of transaction costs on trading strategy profits. Finally, the overall results suggest that the nonlinear models (particularly ANN and NN) considered for the Ibex35 stock future index appear to provide a reasonable description of asset price movements in improving returns forecasts for the chosen horizon.

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Publisher Info
Article provided by Taylor and Francis Journals in its journal Applied Financial Economics.

Volume (Year): 15 (2005)
Issue (Month): 14 (October)
Pages: 963-975
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Handle: RePEc:taf:apfiec:v:15:y:2005:i:14:p:963-975

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  1. Scheinkman, Jose A & LeBaron, Blake, 1989. "Nonlinear Dynamics and Stock Returns," Journal of Business, University of Chicago Press, vol. 62(3), pages 311-37, July. [Downloadable!] (restricted)
  2. Fernandez-Rodriguez, Fernando & Sosvilla-Rivero, Simon, 1998. "Testing nonlinear forecastability in time series: Theory and evidence from the EMS," Economics Letters, Elsevier, vol. 59(1), pages 49-63, April. [Downloadable!] (restricted)
  3. Diebold, Francis X & Mariano, Roberto S, 1995. "Comparing Predictive Accuracy," Journal of Business & Economic Statistics, American Statistical Association, vol. 13(3), pages 253-63, July.
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  4. William F. Sharpe, 1965. "Mutual Fund Performance," Journal of Business, University of Chicago Press, vol. 39, pages 119. [Downloadable!]
  5. Swanson, Norman R. & White, Halbert, 1997. "Forecasting economic time series using flexible versus fixed specification and linear versus nonlinear econometric models," International Journal of Forecasting, Elsevier, vol. 13(4), pages 439-461, December. [Downloadable!] (restricted)
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  1. Stavros Degiannakis & Evdokia Xekalaki, 2007. "Assessing the performance of a prediction error criterion model selection algorithm in the context of ARCH models," Applied Financial Economics, Taylor and Francis Journals, vol. 17(2), pages 149-171, January. [Downloadable!] (restricted)
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