Predictability of Equity Models |
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| Authors: | Rodrigo Chicaroli Pedro L. Valls Pereira |
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| Affiliation: | 1. Pátria Investimentos, S?o Paulo, Brazil;2. S?o Paulo School of Economics, Getulio Vargas Foundation, S?o Paulo, Brazil |
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| Abstract: | In this study, we verify the existence of predictability in the Brazilian equity market. Unlike other studies in the same sense, which evaluate original series for each stock, we evaluate synthetic series created on the basis of linear models of stocks. Following the approach of Burgess (Computational Finance, 1999; 99, 297–312), we use the ‘stepwise regression’ model for the formation of models of each stock. We then use the variance ratio profile together with a Monte Carlo simulation for the selection of models with potential predictability using data from 1 April 1999 to 30 December 2003. Unlike the approach of Burgess, we carry out White's Reality Check (Econometrica, 2000; 68, 1097–1126) in order to verify the existence of positive returns for the period outside the sample from 2 January 2004 to 28 August 2007. We use the strategies proposed by Sullivan, Timmermann and White (Journal of Finance, 1999; 54, 1647–1691) and Hsu and Kuan (Journal of Financial Econometrics, 2005; 3, 606–628) amounting to 26,410 simulated strategies. Finally, using the bootstrap methodology, with 1000 simulations, we find strong evidence of predictability in the models, including transaction costs. Copyright © 2015 John Wiley & Sons, Ltd. |
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| Keywords: | predictability variance ratio profile Monte Carlo simulation reality check bootstrap technical analysis |
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