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Information Flows around the Globe: Predicting Opening Gaps from Overnight Foreign Stock Price Patterns

Author

Listed:
  • Jan G. de Gooijer

    (University of Amsterdam)

  • Cees G.H. Diks

    (University of Amsterdam)

  • Lukasz T. Gatarek

    (Erasmus University Rotterdam)

Abstract

See also the publication J.G. de Gooijer, C.G.H. Diks & L.T. Gatarek, 2012, 'Information flows around the globe: predicting opening gaps from overnight foreign stock price patterns', Central European Journal of Economic Modelling and Econometrics , 4(1), 23-44. This paper describes a forecasting exercise of close-to-open returns on major global stock indices, based on price patterns from foreign markets that have become available overnight. As the close-to-open gap is a scalar response variable to a functional variable, it is natural to focus on functional data analysis. Both parametric and non-parametric modeling strategies are considered, and compared with a simple linear benchmark model. The overall best performing model is nonparametric, suggesting the presence of nonlinear relations between the overnight price patterns and the opening gaps. This effect is mainly due to the European and Asian markets. The North-American and Australian markets appear to be informationally more efficient in that linear models using only the last available information perform well.

Suggested Citation

  • Jan G. de Gooijer & Cees G.H. Diks & Lukasz T. Gatarek, 2009. "Information Flows around the Globe: Predicting Opening Gaps from Overnight Foreign Stock Price Patterns," Tinbergen Institute Discussion Papers 09-107/4, Tinbergen Institute.
    • Handle: RePEc:tin:wpaper:20090107
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    References listed on IDEAS

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    Cited by:

    1. Rodriguez, E. & Aguilar-Cornejo, M. & Femat, R. & Alvarez-Ramirez, J., 2014. "US stock market efficiency over weekly, monthly, quarterly and yearly time scales," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 413(C), pages 554-564.
    2. Katja Ahoniemi & Ana-Maria Fuertes & Jose Olmo, 2016. "Overnight News and Daily Equity Trading Risk Limits," Journal of Financial Econometrics, Oxford University Press, vol. 14(3), pages 525-551.
    3. Ana-Maria Fuertes & Jose Olmo, 2016. "On Setting Day-Ahead Equity Trading Risk Limits: VaR Prediction at Market Close or Open?," JRFM, MDPI, vol. 9(3), pages 1-20, September.
    4. Christian L Dunis & Jason Laws & Jozef Rudy, 2011. "Profitable mean reversion after large price drops: A story of day and night in the S&P 500, 400 MidCap and 600 SmallCap Indices," Journal of Asset Management, Palgrave Macmillan, vol. 12(3), pages 185-202, August.
    5. Jayawardena, Nirodha I. & Todorova, Neda & Li, Bin & Su, Jen-Je, 2020. "Volatility forecasting using related markets’ information for the Tokyo stock exchange," Economic Modelling, Elsevier, vol. 90(C), pages 143-158.
    6. Insana, Alessandra, 2022. "Does systematic risk change when markets close? An analysis using stocks’ beta," Economic Modelling, Elsevier, vol. 109(C).

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    More about this item

    Keywords

    Close-to-open gap forecasting; Functional data analysis; International stock markets; Nonparametric modeling;
    All these keywords.

    JEL classification:

    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation: Models and Applications
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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