Information Flows around the Globe: Predicting Opening Gaps from Overnight Foreign Stock Price Patterns
Jan G. De Gooijer
University of Amsterdam - Department of Quantitative Economics (KE); Tinbergen Institute - Tinbergen Institute Amsterdam (TIA)
Cees G. H. Diks
University of Amsterdam - Faculty of Economics and Business (FEB); Tinbergen Institute - Tinbergen Institute Amsterdam (TIA)
Lukasz T. Gatarek
Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE); Tinbergen Institute
November 20, 2009
Tinbergen Instituut Discussion Paper 09-107/4
This paper describes a forecasting exercise of close-to-open returns on major global stock indices, based on price patterns from foreign markets that have become available overnight. As the close-to-open gap is a scalar response variable to a functional variable, it is natural to focus on functional data analysis. Both parametric and non-parametric modeling strategies are considered, and compared with a simple linear benchmark model. The overall best performing model is nonparametric, suggesting the presence of nonlinear relations between the overnight price patterns and the opening gaps. This effect is mainly due to the European and Asian markets. The North-American and Australian markets appear to be informationally more efficient in that linear models using only the last available information perform well.
Number of Pages in PDF File: 21
Keywords: Close-to-open gap forecasting, Functional data analysis, International stock markets, Nonparametric modeling
JEL Classification: C14, C53, F37, G17working papers series
Date posted: November 23, 2009
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