Non-Linear Forecast of Returns at Bovespa: Trading Volume in a Smooth Transition Auto Regressive Model (Previsao Nao-Linear De Retornos Na Bovespa: Volume Negociado Em Um Modelo Auto-Regressivo De Transicao Suave)

(RAC) Revista de Administração Comtemporânea, Vol. 14, No. 1, January/Feburary 2010

22 Pages Posted: 10 Oct 2008 Last revised: 21 Jan 2010

See all articles by Robert Aldo Iquiapaza

Robert Aldo Iquiapaza

Federal University of Minas Gerais (UFMG) - Center for Post Graduation and Research in Administration (CEPEAD)

Aureliano A. Bressan

Federal University of Minas Gerais (UFMG) - Center for Post Graduation and Research in Administration (CEPEAD)

AMARAL, H. F.

CEPEAD - UFMG

Date Written: October 8, 2008

Abstract

In this study, the predictive power of a logistic smooth transition auto regression model (LSTAR) in generating statistically significant returns is evaluated when the transition variable is trading volume and the lagged return itself, for the Sao Paulo Stock Exchange's Ibovespa Index, with the analysis based on daily data between 1996 and 2006. The reason for the inclusion of trading volume is found in some market characteristics and behavioral finance results, which indicate the existence of a negative relationship between trading volume and future returns. The model shows a good adjustment to the data, although it does not have the ability to generate additional profits if the transaction costs are of 0.5% per trade. For lower costs there is some predictive power, though lower than a AR(1) model and an buy and hold strategy. Considering the risk, for transaction costs of 0.035% per trade, the autoregressive model allowed a Sharpe index 20% bigger than the buy and hold strategy.

Keywords: Return forecast, Non linear models, Ibovespa index, Trading volume, Brazil

JEL Classification: C32, C53, G10

Suggested Citation

Iquiapaza, Robert Aldo and Bressan, Aureliano Angel and Amaral, Hudson Fernandes, Non-Linear Forecast of Returns at Bovespa: Trading Volume in a Smooth Transition Auto Regressive Model (Previsao Nao-Linear De Retornos Na Bovespa: Volume Negociado Em Um Modelo Auto-Regressivo De Transicao Suave) (October 8, 2008). (RAC) Revista de Administração Comtemporânea, Vol. 14, No. 1, January/Feburary 2010, Available at SSRN: https://ssrn.com/abstract=1281203

Robert Aldo Iquiapaza (Contact Author)

Federal University of Minas Gerais (UFMG) - Center for Post Graduation and Research in Administration (CEPEAD) ( email )

Av. Antônio Carlos 6627 - Pampulha
Faculdade de Ciências Econômicas
Belo Horizonte, MG 31270-901
Brazil

HOME PAGE: http://www.cepead.face.ufmg.br

Aureliano Angel Bressan

Federal University of Minas Gerais (UFMG) - Center for Post Graduation and Research in Administration (CEPEAD) ( email )

Av. Antonio Carlos, 6627
MG30170-120 Belo Horizonte, 31270-901
Brazil

Hudson Fernandes Amaral

CEPEAD - UFMG ( email )

Rua Curitiba 832 11º And Centro
Belo Horizonte, MG 30120170
Brazil

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
210
Abstract Views
1,293
rank
172,355
PlumX Metrics