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Prediction Risk and the Forecasting of Stock Market Indexes

Author

Listed:
  • Haefke, Christian

    (Department of Economics, Institute for Advanced Studies, Vienna)

  • Helmenstein, Christian

    (Department of Economics, Institute for Advanced Studies, Vienna)

Abstract

In most of the empirical research on capital markets, stock market indexes are used as proxies for the aggregate market development. In previous work we found that a particular market segment might be less efficient than the whole market and hence easier to forecast. In this paper we extend the focus of this investigation by taking a comprehensive look at the Vienna Stock Exchange. We use feedforward networks and linear models to forecast the all share index WBI as well as various subindexes covering the highly liquid, semi-liquid, and initial public offering (IPO) market segment. In order to shed some light on network construction principles, we compare different models as selected by hold-out crossvalidation (HCV), Akaike's information criterion (AIC), and Schwartz' information criterion (SIC). The forecasts are subsequently evaluated on the basis of hypothetical trading in the out-of-sample period.

Suggested Citation

  • Haefke, Christian & Helmenstein, Christian, 1995. "Prediction Risk and the Forecasting of Stock Market Indexes," Economics Series 20, Institute for Advanced Studies.
  • Handle: RePEc:ihs:ihsesp:20
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    File URL: http://www.ihs.ac.at/publications/eco/es-20.pdf
    File Function: First version, 1995
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    More about this item

    Keywords

    Neural Network Architecture Selection; Information Criteria; Stock Market Indexes; Trading Strategy;

    JEL classification:

    • C45 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Neural Networks and Related Topics
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • C43 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Index Numbers and Aggregation

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