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

  • Caporin, Massimiliano

    ()

  • Ranaldo, Angelo

    ()

  • Santucci de Magistris, Paolo

    ()

Contrary to the common wisdom that asset prices are barely possible to forecast, we show that 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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File URL: http://ux-tauri.unisg.ch/RePEc/usg/sfwpfi/WPF-1213.pdf
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Paper provided by University of St. Gallen, School of Finance in its series Working Papers on Finance with number 1213.

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Length: 25 pages
Date of creation: Feb 2012
Date of revision:
Handle: RePEc:usg:sfwpfi:2012:13
Contact details of provider: Phone: +41 71 243 40 11
Fax: +41 71 243 40 40
Web page: http://www.unisg.ch/de/universitaet/schools/finance

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