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

  • Massimiliano Caporin
  • Angelo Ranaldo

Contrary to the common wisdom that asset prices are hardly 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.

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Paper provided by Swiss National Bank in its series Working Papers with number 2011-11.

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Length: 34 pages
Date of creation: 2011
Date of revision:
Handle: RePEc:snb:snbwpa:2011-11
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