New research helps predict stock market

Feb 20, 2009
stock market

(PhysOrg.com) -- Researchers from Massey University have developed a new way to predict stock markets that has been recognised with an award from New Zealand finance specialists.

Professor Ben Jacobsen, Associate Professor Ben Marshall and Dr Nuttawat Visaltanachoti have found that analysing data on a daily basis or other shorter intervals - rather than monthly - offers a much higher success rate of stock market predictions.

Traditionally, institutional investors, such as hedge funds or mutual and pension funds, try to predict stock markets one month ahead relying on information also measured at monthly levels.

The academic researchers have moved away from that convention with what they have described as “amazing results”.

The research was awarded best investments paper by the Institute of Financial Professionals at the New Zealand Finance Colloquium this month.

The team studied how changes in prices of energy, such as oil, and industrial metals, such as aluminium and zinc, strongly influence world stock markets.

Dr Marshall says the paper, Return Predictability Revisited, is an eye-opener both practically and academically. “While the change of intervals seems innocent enough, this new approach suggests that stock market returns are much more predictable than previously thought. Economic variables that seemed unimportant now may warrant a second look, but measured at a different interval.

“Professional investors in Europe are already starting to implement this approach. Theoretically, the study is of interest because it shows how an innocuous change in observation intervals has a dramatic impact on the way we think about financial markets in the academic world.

“With hindsight, it seems surprising that many professional investors and academics alike have overlooked the possibility that the interval of observation would make a huge difference in trying to predict markets.”

Dr Marshall says the traditional approach to use monthly observations to predict monthly returns is a “crude” approach based on convention rather than theory. “When predicting March, we are saying look at the last week or even the last day of February because that could be more relevant,” he says. “Using a full month of data to predict may increase noise levels and understate - or even fully mask, the actual predictability present.”

It is the third time Professor Jacobsen has received the investments paper award and the second time for Dr Visaltanachoti.
Researchers from Massey University have developed a new way to predict stock markets that has been recognised with an award from New Zealand finance specialists.

Professor Ben Jacobsen, Associate Professor Ben Marshall and Dr Nuttawat Visaltanachoti have found that analysing data on a daily basis or other shorter intervals - rather than monthly - offers a much higher success rate of stock market predictions.

Traditionally, institutional investors, such as hedge funds or mutual and pension funds, try to predict stock markets one month ahead relying on information also measured at monthly levels.

The academic researchers have moved away from that convention with what they have described as “amazing results”.

The research was awarded best investments paper by the Institute of Financial Professionals at the New Zealand Finance Colloquium this month.

The team studied how changes in prices of energy, such as oil, and industrial metals, such as aluminium and zinc, strongly influence world stock markets.

Dr Marshall says the paper, Return Predictability Revisited, is an eye-opener both practically and academically. “While the change of intervals seems innocent enough, this new approach suggests that stock market returns are much more predictable than previously thought. Economic variables that seemed unimportant now may warrant a second look, but measured at a different interval.

“Professional investors in Europe are already starting to implement this approach. Theoretically, the study is of interest because it shows how an innocuous change in observation intervals has a dramatic impact on the way we think about financial markets in the academic world.

“With hindsight, it seems surprising that many professional investors and academics alike have overlooked the possibility that the interval of observation would make a huge difference in trying to predict markets.”

Dr Marshall says the traditional approach to use monthly observations to predict monthly returns is a “crude” approach based on convention rather than theory. “When predicting March, we are saying look at the last week or even the last day of February because that could be more relevant,” he says. “Using a full month of data to predict may increase noise levels and understate - or even fully mask, the actual predictability present.”

It is the third time Professor Jacobsen has received the investments paper award and the second time for Dr Visaltanachoti.

Provided by Massey University

Explore further: Can science eliminate extreme poverty?

add to favorites email to friend print save as pdf

Related Stories

Performance measures for CEOs vary greatly, study finds

9 hours ago

As companies file their annual proxy statements with the U.S. Securities and Exchange Commission (SEC) this spring, a new study by Rice University and Cornell University shows just how S&P 500 companies have ...

Samsung looks to life beyond the smartphone

Apr 13, 2014

After years of record profit growth, tech giant Samsung Electronics looks to be at a commercial crossroads as it searches for a new growth driver to counter slowing sales of its phenomenally successful smartphones.

Spain's eDreams Odigeo skids on market debut

Apr 08, 2014

Spanish online travel group eDreams Odigeo's share price tumbled as it listed on the Madrid stock exchange Tuesday, a worrying sign for the richest new entry to the market in nearly three years.

Recommended for you

Can science eliminate extreme poverty?

Apr 16, 2014

Science has often come to the rescue when it comes to the world's big problems, be it the Green Revolution that helped avoid mass starvation or the small pox vaccine that eradicated the disease. There is ...

Japan stem cell body splashes cash on luxury furniture

Apr 14, 2014

A publicly-funded research institute in Japan, already embattled after accusing one of its own stem cell scientists of faking data, has spent tens of thousands of dollars on designer Italian furniture, reportedly to use up ...

User comments : 3

Adjust slider to filter visible comments by rank

Display comments: newest first

Soylent
5 / 5 (2) Feb 20, 2009
The recursive nature of stock markets makes them exceedingly difficult to predict. Your model needs to be designed to include the behaviour of other stock market participants. If other stock market participants begin using your model their actions will distort the stock-market so that your predictions become less accurate. It's red queen's race, need to keep running as fast as you can just to stay in the same place.
googleplex
4 / 5 (1) Feb 20, 2009
I agree.
It is like a technological war between large trading houses. Yesterdays models won't work today. They hire the brightest academic minds to build the models.
Another point is that if the model is so good how come they aren't billionaires already instead of wasting time writing research papers.
It is no suprise to me that a 30 day moving average is worse at forecasting tomorrow than a 7 day moving average. Any serious investor knows that moving averages are not designed for daily predicting a spot price. They are designed to signal a change in trend and figure out support levels/trading ranges etc. Trend is your friend.
menkaur
not rated yet Feb 21, 2009
The recursive nature of stock markets makes them exceedingly difficult to predict.

not difficult.... it's impossible...
once research on some regularity in market becomes public, it's useless
so, i'd call the article bullshit...

More news stories

Can new understanding avert tragedy?

As a boy growing up in Syracuse, NY, Sol Hsiang ran an experiment for a school project testing whether plants grow better sprinkled with water vs orange juice. Today, 20 years later, he applies complex statistical ...

Crowd-sourcing Britain's Bronze Age

A new joint project by the British Museum and the UCL Institute of Archaeology is seeking online contributions from members of the public to enhance a major British Bronze Age archive and artefact collection.

Roman dig 'transforms understanding' of ancient port

(Phys.org) —Researchers from the universities of Cambridge and Southampton have discovered a new section of the boundary wall of the ancient Roman port of Ostia, proving the city was much larger than previously ...

Cosmologists weigh cosmic filaments and voids

(Phys.org) —Cosmologists have established that much of the stuff of the universe is made of dark matter, a mysterious, invisible substance that can't be directly detected but which exerts a gravitational ...

Bionic ankle 'emulates nature'

These days, Hugh Herr, an associate professor of media arts and sciences at MIT, gets about 100 emails daily from people across the world interested in his bionic limbs.