Non-Linear Forecasting Methods: Some Applications to the Analysis of Financial Series

Abstract:     
The evolution of financial data shows a high degree of volatility of the series, coupled with increasing difficulties of forecasting the shorter is the time horizon, when using standard (i.e., based on linear models) forecasting methods. Some alternative forecasting methods for non-linear time series, based on the literature on complex dynamic systems, have been recently developed, which can be particularly useful in the analysis of financial time series. In this paper we present a summary of some of these new techniques, and then show some applications to the analysis of several financial series (i.e., exchange rates, stock prices, and interest rates), which illustrate the usefulness of the approach. Since non-linear forecasting methods require the usage of very long time series, the availability of high-frequency data for these variables make them the best candidates among economic time series for the application of this methodology.

Number of Pages in PDF File: 24

Keywords: Nearest-neighbour prediction methods, Financial markets, Technical trading rules

JEL Classification: C53, G12, G15

working papers series