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On the Predictability of Stock Prices: A Case for High and Low Prices

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  • Massimiliano Caporin

    () (University of Padova)

  • Angelo Ranaldo

    () (Swiss National Bank)

  • Paolo Santucci de Magistris

    () (University of Padova)

Abstract

Contrary to the common wisdom that asset prices are barely possible to forecast, we show that high and low prices of equity shares are largely predictable. We propose to model them using a simple implementation of a fractional vector autoregressive model with error correction (FVECM). This model captures two fundamental patterns of high and low prices: their cointegrating relationship and the long memory of their difference (i.e. the range), which is a measure of realized volatility. Investment strategies based on FVECM predictions of high-low US equity prices as exit-entry signals deliver a superior performance even on a risk-adjusted basis.

Suggested Citation

  • Massimiliano Caporin & Angelo Ranaldo & Paolo Santucci de Magistris, 2011. "On the Predictability of Stock Prices: A Case for High and Low Prices," "Marco Fanno" Working Papers 0136, Dipartimento di Scienze Economiche "Marco Fanno".
  • Handle: RePEc:pad:wpaper:0136
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    Cited by:

    1. Massimiliano Caporin & Fulvio Fontini & Paolo Santucci De Magistris, 2017. "Price convergence within and between the Italian electricity day-ahead and dispatching services markets," "Marco Fanno" Working Papers 0215, Dipartimento di Scienze Economiche "Marco Fanno".
    2. repec:eee:quaeco:v:66:y:2017:i:c:p:115-126 is not listed on IDEAS
    3. Baruník, Jozef & Dvořáková, Sylvie, 2015. "An empirical model of fractionally cointegrated daily high and low stock market prices," Economic Modelling, Elsevier, vol. 45(C), pages 193-206.
    4. repec:ibn:ijefaa:v:9:y:2017:i:8:p:40-50 is not listed on IDEAS
    5. Ni, Yensen & Liao, Yi-Ching & Huang, Paoyu, 2015. "MA trading rules, herding behaviors, and stock market overreaction," International Review of Economics & Finance, Elsevier, vol. 39(C), pages 253-265.

    More about this item

    Keywords

    high and low prices; predictability of asset prices; range; fractional cointegration; exit-entry trading signals; chart-technical analysis.;

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics

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