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Predictability of equity models

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  • Pereira, Pedro Luiz Valls

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 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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Bibliographic Info

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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Date of creation: 27 Jan 2009
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Handle: RePEc:fgv:eesptd:176

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  1. Andrew W. Lo & A. Craig MacKinlay, 1995. "Maximizing Predictability in the Stock and Bond Markets," NBER Working Papers 5027, National Bureau of Economic Research, Inc.
  2. Baptista, Ricardo Fuscaldi de Figueiredo & Pereira, Pedro Luiz Valls, 2009. "Análise do desempenho de regras da análise técnica aplicada ao mercado intradiário do contrato futuro do índice Ibovespa," Textos para discussão 173, Escola de Economia de São Paulo, Getulio Vargas Foundation (Brazil).
  3. Andrew W. Lo & A. Craig MacKinlay, 1989. "Data-Snooping Biases in Tests of Financial Asset Pricing Models," NBER Working Papers 3001, National Bureau of Economic Research, Inc.
  4. Sullivan, Ryan & Timmermann, Allan G & White, Halbert, 1998. "Data-Snooping, Technical Trading Rule Performance and the Bootstrap," CEPR Discussion Papers 1976, C.E.P.R. Discussion Papers.
  5. Po-Hsuan Hsu & Chung-Ming Kuan, 2004. "Re-Examining the Profitability of Technical Analysis with White’s Reality Check," IEAS Working Paper : academic research 04-A003, Institute of Economics, Academia Sinica, Taipei, Taiwan.
  6. Halbert White, 2000. "A Reality Check for Data Snooping," Econometrica, Econometric Society, vol. 68(5), pages 1097-1126, September.
  7. Pereira, Pedro Luiz Valls, 2009. "“Ombro-cabeça-ombro” : testando a lucratividade do padrão gráfico de análise técnica no mercado de ações brasileiro," Textos para discussão 181, Escola de Economia de São Paulo, Getulio Vargas Foundation (Brazil).
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