A High-Low Model of Daily Stock Price Ranges

HKIMR Working Paper No.3/2009

42 Pages Posted: 2 Feb 2009

See all articles by Stephen Yan-Leung Cheung

Stephen Yan-Leung Cheung

City University of Hong Kong (CityUHK) - Department of Economics & Finance

Yin-Wong Cheung

City University of Hong Kong - Department of Economics & Finance; University of California, Santa Cruz - Department of Economics; University of California at Santa Cruz - Department of Economics

Alan T. K. Wan

City University of Hong Kong (CityUHK) - Department of Management Sciences

Multiple version iconThere are 2 versions of this paper

Date Written: January 29, 2009

Abstract

We observe that daily highs and lows of stock prices do not diverge over time and, hence, adopt the cointegration concept and the related vector error correction model (VECM) to model the daily high, the daily low, and the associated daily range data. The in-sample results attest the importance of incorporating high-low interactions in modeling the range variable. In evaluating the out-of-sample forecast performance using both mean-squared forecast error and direction of change criteria, it is found that the VECM-based low and high forecasts offer some advantages over some alternative forecasts. The VECM-based range forecasts, on the other hand, do not always dominate - the forecast rankings depend on the choice of evaluation criterion and the variables being forecasted.

Keywords: Daily High, Daily Low, VECM Model, Forecast Performance, Implied Volatility

JEL Classification: C32, C53, G10

Suggested Citation

Cheung, Stephen Yan-Leung and Cheung, Yin-Wong and Wan, Alan T. K., A High-Low Model of Daily Stock Price Ranges (January 29, 2009). HKIMR Working Paper No.3/2009, Available at SSRN: https://ssrn.com/abstract=1336448 or http://dx.doi.org/10.2139/ssrn.1336448

Stephen Yan-Leung Cheung

City University of Hong Kong (CityUHK) - Department of Economics & Finance ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong
+852 2788 7960 (Phone)
+852 2788 8806 (Fax)

Yin-Wong Cheung (Contact Author)

City University of Hong Kong - Department of Economics & Finance ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong

University of California, Santa Cruz - Department of Economics ( email )

435 Engineering 2
Santa Cruz, CA 95064
United States
831-459-4247 (Phone)
831-459-5077 (Fax)

University of California at Santa Cruz - Department of Economics ( email )

1156 High Street
Santa Cruz, CA 95064
United States

Alan T. K. Wan

City University of Hong Kong (CityUHK) - Department of Management Sciences ( email )

Tat Chee Avenue
Kowloon Tong
Kowloon
Hong Kong

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