|Appears in Collections:||Economics Journal Articles|
|Peer Review Status:||Refereed|
|Title:||Non-linear forecasting of stock returns: Does volume help?|
|Keywords:||Stock market returns|
|Citation:||McMillan D (2007) Non-linear forecasting of stock returns: Does volume help?, International Journal of Forecasting, 23 (1), pp. 115-126.|
|Abstract:||The testing for and estimation of non-linear dynamics in equity returns is a growing area of empirical finance research. This paper extends this line of research by examining whether a hitherto unconsidered variable, namely volume, imparts non-linear dynamics within equity returns and whether it has forecasting power. A significant amount of evidence supports a negative relationship between volume and future returns, which in turn suggests that volume could act as a suitable threshold variable. The results presented here provide evidence of a logistic smooth-transition model for four international stock market returns, with lagged volume as the threshold. Further, this model provides better out-of-sample forecasts than a corresponding logistic smooth-transition autoregressive model, a simple AR model and a random walk model based on a trading rule. In addition, this model also provides better forecasting performance in three cases against alternate non-linear specifications. This provides evidence in favour of non-linear dynamics, in contrast with previous evidence, which had suggested the relative failure of non-linear models in forecasting exercises.|
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