Do Extreme Falls Help Forecasting Stock Returns? International Evidence

CUBS Faculty of Finance Working Paper No. 06

Cass Business School Research Paper

18 Pages Posted: 22 Oct 2001

See all articles by Erdem Basci

Erdem Basci

Bilkent University - Department of Economics

Sidika Basci

ESTIM Forecasting Center

Yaz Gulnur Muradoglu

Queen Mary University of London; City University London - Sir John Cass Business School

Date Written: October 2001

Abstract

We report international evidence for the presence of stock return rebounds following extreme falls in market indices. The data consists of weekly national index returns for 21 world markets. A non-linear time series model is used to capture part of the variation in return autocorrelations across countries and over time. A third order polynomial model PAR(3,1) on lagged returns, coupled with GARCH residuals, is capable of generating a time varying auto-correlation structure. In all of the national markets, the return forecasts from the PAR(3,1) models are above those from linear alternative s in weeks following extreme falls. For emerging markets, where the non-linearity is more pronounced, a trading rule test is also implemented, in addition to the traditional likelihood ratio test of model specification. The overall results indicate the presence of non-linearity in the mean equation of stock return processes.

Keywords: Stock return rebounds, predictability, autocorrelations, non-linear models, model selection, trading-rule tests, emerging markets, market indices, weekly return dynamics

JEL Classification: G14, G15

Suggested Citation

Basci, Erdem and Basci, Sidika and Muradoglu, Yaz Gulnur, Do Extreme Falls Help Forecasting Stock Returns? International Evidence (October 2001). CUBS Faculty of Finance Working Paper No. 06; Cass Business School Research Paper. Available at SSRN: https://ssrn.com/abstract=287655 or http://dx.doi.org/10.2139/ssrn.287655

Erdem Basci

Bilkent University - Department of Economics ( email )

06533 Ankara
Turkey

Sidika Basci

ESTIM Forecasting Center ( email )

Sairler sok. 32/C
Gaziosmanpasa 06700
Turkey

Yaz Gulnur Muradoglu (Contact Author)

Queen Mary University of London ( email )

Francis Bancroft Building
Mile End Road
London, E1 4NS
United Kingdom

City University London - Sir John Cass Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom
+44 20 7040 0124 (Phone)
+44 20 7040 8853 (Fax)

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