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The Profitability in the FTSE 100 Index: A New Markov Chain Approach

descriptionPublicationkeyboard_double_arrow_right Article 10 Sep 2019 Portugal Publisher:Springer Science and Business Media LLCJournal:Asia-Pacific Financial Markets, volume 27, pages 61-81 (issn: 1387-2834, eissn: 1573-6946,

Authors: Flavio Ivo Riedlinger; João Nicolau;

doi: 10.1007/s10690-019-09282-4

handle: 10400.5/27503

The Profitability in the FTSE 100 Index: A New Markov Chain Approach

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Abstract

In this paper, we propose a new method to predict stock market trends based on the multivariate Markov chain (MMC) methodology. Our approach consists of forecasting the one-period ahead FTSE 100 Index behavior, using the MTD-Probit model. The MTD-Probit model is a new approach for estimating MMC, based on multiple categorical data sequences that can be used to forecast financial markets. In this context, we propose a simple trading strategy and analyze its profitability using the White “Reality Check” and the Hansen SPA data snooping bias tests. Our empirical results suggest that the MTD-Probit model applied to the FTSE 100 Index cannot significantly out-perform the buy-and-hold benchmark after data-snooping is controlled.

Country

Portugal

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Keywords

Multivariate Markov Chain, FTSE 100 Index, Stock Market

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