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Memory that Drives! New Insights into Forecasting Performance of Stock Prices from SEMIFARMA-AEGAS Model

Author

Listed:
  • Mohamed Chikhi
  • Claude Diebolt
  • Tapas Mishra
Abstract
Stock price forecasting, a popular growth-enhancing exercise for investors, is inherently complex – thanks to the interplay of financial economic drivers which determine both the magnitude of memory and the extent of non-linearity within a system. In this paper, we accommodate both features within a single estimation framework to forecast stock prices and identify the nature of market efficiency commensurate with the proposed model. We combine a class of semiparametric autoregressive fractionally integrated moving average (SEMIFARMA) model with asymmetric exponential generalized autoregressive score (AEGAS) errors to design a SEMIRFARMA-AEGAS framework based on which predictive performance of this model is tested against competing methods. Our conditional variance includes leverage effects, jumps and fat tail-skewness distribution, each of which affects magnitude of memory in a stock price system. A true forecast function is built and new insights into stock price forecasting are presented. We estimate several models using the Skewed Student-t maximum likelihood and find that the informational shocks have permanent effects on returns and the SEMIFARMA-AEGAS is appropriate for capturing volatility clustering for both negative (long Value-at-Risk) and positive returns (short Value-at-Risk). We show that this model has better predictive performance over competing models for both long and/or some short time horizons. The predictions from SEMIRFARMA-AEGAS model beats comfortably the random walk model. Our results have implications for market-efficiency: the weak efficiency assumption of financial markets stands violated for all stock price returns studied over a long period.

Suggested Citation

  • Mohamed Chikhi & Claude Diebolt & Tapas Mishra, 2019. "Memory that Drives! New Insights into Forecasting Performance of Stock Prices from SEMIFARMA-AEGAS Model," Working Papers of BETA 2019-24, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
    • Handle: RePEc:ulp:sbbeta:2019-24
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    More about this item

    Keywords

    Stock price forecasting; SEMIFARMA model; AEGAS model; Skewed Student-t maximum likelihood; Asymmetry; Jumps.;
    All these keywords.

    JEL classification:

    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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