Template-type: ReDIF-Paper 1.0
Author-Name: Massimiliano Caporin
Author-Name-First: Massimiliano
Author-Name-Last: Caporin
Author-Person: pca441
Author-Name: Angelo Ranaldo
Author-Name-First: Angelo
Author-Name-Last: Ranaldo
Author-Person: pra161
Title: On the Predictability of Stock Prices: a Case for High and Low Prices
Abstract: 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.
Length: 34 pages
Creation-Date: 2011
Contact-Email: forschung@snb.ch
File-URL: https://www.snb.ch/en/publications/research/working-papers/2011/working_paper_2011_11
File-Format: text/html
Number: 2011-11
Classification-JEL: G11, G17, C53, C58
Keywords: high and low prices, predictability of asset prices, range, fractional cointegration, exit/entry trading signals, chart/technical analysis
Handle: RePEc:snb:snbwpa:2011-11