Information Flows around the Globe: Predicting Opening Gaps from Overnight Foreign Stock Price Patterns

Tinbergen Instituut Discussion Paper 09-107/4

21 Pages Posted: 23 Nov 2009

See all articles by Jan G. De Gooijer

Jan G. De Gooijer

University of Amsterdam - Department of Quantitative Economics (KE)

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

Date Written: November 20, 2009

Abstract

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.

Keywords: Close-to-open gap forecasting, Functional data analysis, International stock markets, Nonparametric modeling

JEL Classification: C14, C53, F37, G17

Suggested Citation

De Gooijer, Jan G. and Diks, Cees G. H. and Gatarek, Lukasz T., Information Flows around the Globe: Predicting Opening Gaps from Overnight Foreign Stock Price Patterns (November 20, 2009). Tinbergen Instituut Discussion Paper 09-107/4. Available at SSRN: https://ssrn.com/abstract=1510069 or http://dx.doi.org/10.2139/ssrn.1510069

Jan G. De Gooijer (Contact Author)

University of Amsterdam - Department of Quantitative Economics (KE) ( email )

Roetersstraat 11
Amsterdam, 1018 WB
Netherlands

Cees G. H. Diks

University of Amsterdam - Faculty of Economics and Business (FEB) ( email )

Roetersstraat 11
Amsterdam, 1018 WB
Netherlands
+31 20 525 53 29 (Phone)
+31 20 525 4349 (Fax)

Tinbergen Institute - Tinbergen Institute Amsterdam (TIA) ( email )

Gustav Mahlerplein 117
Amsterdam, 1082 MS
Netherlands

Lukasz T. Gatarek

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )

Tinbergen Institute

Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands

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