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Hans Byström

Professor

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The Compass Rose Pattern of the Stock Market: How Does it Affect Parameter Estimates, Forecasts, and Statistical Tests?

Författare

  • Henrik Amilon
  • Hans Byström

Summary, in English

A "compass rose" pattern sometimes appears when stock returns are plotted against themselves with a one-day lag, since stock prices move in discrete steps. In this paper, we perform a Monte Carlo study on simulated stock price series rounded in different ways to mirror the behavior of stocks on the Stockholm Stock Exchange. We find AR-GARCH parameter estimates to be affected by the discreteness imposed by rounding. Based on the compass rose and the discreteness, we investigate, theoretically and empirically, different possibilities of improving predictions of stock returns. The distributions of the BDS test as well as Savit and Green's dependability index are also influenced by the compass rose pattern. However, throughout the paper, we must impose unrealistically heavy rounding of the stock prices to find significant effects on our estimates, forecasts, and statistical tests.

Avdelning/ar

  • Nationalekonomiska institutionen

Publiceringsår

2000

Språk

Engelska

Publikation/Tidskrift/Serie

Working Papers

Avvikelse

2000:18

Dokumenttyp

Working paper

Förlag

Department of Economics, Lund University

Ämne

  • Economics

Aktiv

Published