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Options as a predictor of common stock price changes

Author

Listed:
  • Dirk Emma Baestaens
  • Willem Max Van Den Bergh
  • Herve Vaudrey

Abstract

Since rather novel techniques such as neural nets allow investigation of nonlinear model specification previously untested, it may be that traditional models of price formation underperform through misspecification rather than market efficiency. This paper explores whether a multilayer backpropagation model offers exploitable profit opportunities for some limited period. Using an intradaytransaction dataset obtained from the European Options Exchange (Amsterdam), We attempted to predict the return on Philips. Two neural nets are contrasted to ordinary linear regression analysis on the basis of three benchmarks (MSE, and net realized returns). An adaptively trained 33-14-1 architecture scored best on all criteria and yielded an annualized 11% return following a simple one-period trading strategy.

Suggested Citation

  • Dirk Emma Baestaens & Willem Max Van Den Bergh & Herve Vaudrey, 1995. "Options as a predictor of common stock price changes," The European Journal of Finance, Taylor & Francis Journals, vol. 1(4), pages 325-343.
    • Handle: RePEc:taf:eurjfi:v:1:y:1995:i:4:p:325-343
    DOI: 10.1080/13518479500000023
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