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Predictability of Equity Models

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  • Valls Pereira, Pedro L.
  • Chicaroli, Rodrigo

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 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. Unlike Burgess (1999), we carry out White’s Reality Check (2000) in order to verify the existence of positive returns for the period outside the sample. We use the strategies proposed 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

Suggested Citation

  • Valls Pereira, Pedro L. & Chicaroli, Rodrigo, 2009. "Predictability of Equity Models," MPRA Paper 10955, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:10955
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    References listed on IDEAS

    as
    1. Baptista, Ricardo F. de F. & Valls Pereira, Pedro L., 2008. "Análise do Desempenho de Regras de Análise Técnica Aplicada ao Mercado Intradiário do Contrato Futuro do Índice Bovespa [Analysis of the performance of Technical Analysis startegies applied to Intr," MPRA Paper 10351, University Library of Munich, Germany.
    2. Lo, Andrew W. & Mackinlay, A. Craig, 1997. "Maximizing Predictability In The Stock And Bond Markets," Macroeconomic Dynamics, Cambridge University Press, vol. 1(1), pages 102-134, January.
    3. Ryan Sullivan & Allan Timmermann & Halbert White, 1999. "Data‐Snooping, Technical Trading Rule Performance, and the Bootstrap," Journal of Finance, American Finance Association, vol. 54(5), pages 1647-1691, October.
    4. Pereira, Pedro L. Valls, 2009. "Ombro-cabeça-ombro: testando a lucratividade do padrão gráfico de análise técnica no mercado de ações brasileiro," Textos para discussão 181, FGV EESP - Escola de Economia de São Paulo, Fundação Getulio Vargas (Brazil).
    5. Halbert White, 2000. "A Reality Check for Data Snooping," Econometrica, Econometric Society, vol. 68(5), pages 1097-1126, September.
    6. Lo, Andrew W & MacKinlay, A Craig, 1990. "Data-Snooping Biases in Tests of Financial Asset Pricing Models," Review of Financial Studies, Society for Financial Studies, vol. 3(3), pages 431-467.
    7. 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.
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    More about this item

    Keywords

    predictability; variance ratio profile; Monte Carlo simulation; reality check; bootstrap; technical analysis;
    All these keywords.

    JEL classification:

    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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