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The Compass Rose Pattern of the Stock Market: How Does it Affect Parameter Estimates, Forecasts, and Statistical Tests?

Amilon, Henrik and Byström, Hans LU (2000) In Working Papers
Abstract
A "compass rose" pattern sometimes appears when stock returns are plotted against themselves with a one-day lag, since stock prices move in discrete steps. In this paper, we perform a Monte Carlo study on simulated stock price series rounded in different ways to mirror the behavior of stocks on the Stockholm Stock Exchange. We find AR-GARCH parameter estimates to be affected by the discreteness imposed by rounding. Based on the compass rose and the discreteness, we investigate, theoretically and empirically, different possibilities of improving predictions of stock returns. The distributions of the BDS test as well as Savit and Green's dependability index are also influenced by the compass rose pattern. However, throughout the paper, we... (More)
A "compass rose" pattern sometimes appears when stock returns are plotted against themselves with a one-day lag, since stock prices move in discrete steps. In this paper, we perform a Monte Carlo study on simulated stock price series rounded in different ways to mirror the behavior of stocks on the Stockholm Stock Exchange. We find AR-GARCH parameter estimates to be affected by the discreteness imposed by rounding. Based on the compass rose and the discreteness, we investigate, theoretically and empirically, different possibilities of improving predictions of stock returns. The distributions of the BDS test as well as Savit and Green's dependability index are also influenced by the compass rose pattern. However, throughout the paper, we must impose unrealistically heavy rounding of the stock prices to find significant effects on our estimates, forecasts, and statistical tests. (Less)
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Working paper/Preprint
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in
Working Papers
issue
2000:18
publisher
Department of Economics, Lund University
language
English
LU publication?
yes
id
3d9f11c3-4c0b-4b34-928e-7595cd6e8397 (old id 1385228)
date added to LUP
2016-04-04 11:17:04
date last changed
2024-09-26 16:02:28
@misc{3d9f11c3-4c0b-4b34-928e-7595cd6e8397,
  abstract     = {{A "compass rose" pattern sometimes appears when stock returns are plotted against themselves with a one-day lag, since stock prices move in discrete steps. In this paper, we perform a Monte Carlo study on simulated stock price series rounded in different ways to mirror the behavior of stocks on the Stockholm Stock Exchange. We find AR-GARCH parameter estimates to be affected by the discreteness imposed by rounding. Based on the compass rose and the discreteness, we investigate, theoretically and empirically, different possibilities of improving predictions of stock returns. The distributions of the BDS test as well as Savit and Green's dependability index are also influenced by the compass rose pattern. However, throughout the paper, we must impose unrealistically heavy rounding of the stock prices to find significant effects on our estimates, forecasts, and statistical tests.}},
  author       = {{Amilon, Henrik and Byström, Hans}},
  language     = {{eng}},
  note         = {{Working Paper}},
  number       = {{2000:18}},
  publisher    = {{Department of Economics, Lund University}},
  series       = {{Working Papers}},
  title        = {{The Compass Rose Pattern of the Stock Market: How Does it Affect Parameter Estimates, Forecasts, and Statistical Tests?}},
  url          = {{https://lup.lub.lu.se/search/files/195340029/WP00_18.pdf}},
  year         = {{2000}},
}