The profitability in the FTSE 100 index: a new Markov chain approach. (English) Zbl 1437.91420
Summary: 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.
MSC:
| 91G15 | Financial markets |
| 60J20 | Applications of Markov chains and discrete-time Markov processes on general state spaces (social mobility, learning theory, industrial processes, etc.) |
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