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 formationof models of each stock. We then use the variance ratio profile together with a MonteCarlo simulation for the selection of models with potential predictability. UnlikeBurgess (1999), we carry out White’s Reality Check (2000) in order to verify theexistence of positive returns for the period outside the sample. We use the strategiesproposed 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.
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Paper provided by Escola de Economia de São Paulo, Getulio Vargas Foundation (Brazil) in its series Textos para discussão with number
176.
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