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Forecasting the Spanish Stock Market Returns with Fractional and Non-Fractional Models

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Author(s): Guglielmo M. Caporale | Juncal Cunado | Luis A. Gil-Alana

Journal: American Journal of Economics and Business Administration
ISSN 1945-5488

Volume: 3;
Issue: 4;
Start page: 586;
Date: 2011;
Original page

Keywords: Fractional integration | stock market returns

ABSTRACT
Problem statement: The content of this note was to assess the forecasting accuracy of various models of the Spanish stock market returns. Approach: We use daily data on the IBEX 35 for the time period January 4th, 2001-March 28th, 2006 and employ both fractional and non-fractional models. Results: The results on the prediction errors for the out-of-sample forecasts indicate that the fractional models outperform the non-fractional ones. Conclusion: Standard forecasting criteria suggest that the ARFIMA (1, d, 0) model with d = -0.017 and the AR (1) coefficient equal to 0.068 is the best specification for this series. That implies that the stock market prices display a very small degree of mean reversion behavior.
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