On the Predictability of Stock Prices: A Case for High and Low Prices

42 Pages Posted: 18 Jun 2011 Last revised: 20 May 2013

See all articles by Massimiliano Caporin

Massimiliano Caporin

University of Padua - Department of Statistical Sciences

Angelo Ranaldo

University of Basel - Faculty of Business and Economics; Swiss Finance Institute; University of St. Gallen

Paolo Santucci de Magistris

Luiss University of Rome

Date Written: June 16, 2011

Abstract

Contrary to the common wisdom that asset prices are barely possible to forecast, we show that that high and low prices of equity shares are largely predictable. We propose to model them using a simple implementation of a fractional vector autoregressive model with error correction (FVECM). This model captures two fundamental patterns of high and low prices: their cointegrating relationship and the long memory of their difference (i.e. the range), which is a measure of realized volatility. Investment strategies based on FVECM predictions of high/low US equity prices as exit/entry signals deliver a superior performance even on a risk-adjusted basis.

Keywords: high and low prices, predictability of asset prices, range, fractional cointegration, exit/entry trading signals, chart/technical analysis

JEL Classification: G11, G17, C53, C58

Suggested Citation

Caporin, Massimiliano and Ranaldo, Angelo and Santucci de Magistris, Paolo, On the Predictability of Stock Prices: A Case for High and Low Prices (June 16, 2011). Journal of Banking and Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1866223 or http://dx.doi.org/10.2139/ssrn.1866223

Massimiliano Caporin (Contact Author)

University of Padua - Department of Statistical Sciences ( email )

Via Battisti, 241
Padova, 35121
Italy

Angelo Ranaldo

University of Basel - Faculty of Business and Economics ( email )

Petersplatz 1
Basel, 4001
Switzerland

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland
+41796637711 (Phone)

HOME PAGE: http://www.sfi.ch/de/about-us/news/hsg-faculty-members

University of St. Gallen ( email )

School of Finance
Unterer Graben 21
St. Gallen, 9000
Switzerland
+41712247010 (Phone)

HOME PAGE: http://fin-sr.unisg.ch

Paolo Santucci de Magistris

Luiss University of Rome ( email )

Viale Romania 32
Rome, 00197
Italy

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