Technical analysis based on high and low stock prices forecasts: evidence for Brazil using a fractionally cointegrated VAR model

摘要

This paper addresses the modeling and forecasting of daily high and low asset prices in the Brazilian stock market using a fractionally cointegrated vector autoregressive model (FCVAR). Forecasts are then used in a simple trading strategy to evaluate the application of technical analysis (TA) for equity shares traded at the B3. As a flexible framework, FCVAR is able to account for two fundamental patterns of high and low asset prices: their cointegrating relationship and the long-memory of their difference (i.e., the range), a measure of realized volatility. The analysis comprises the twenty most traded stocks at the B3 during the period from January 2010 to May 2017. Empirical findings indicate a significant cointegration relationship between daily high and low prices, which are integrated of an order close to the unity, as well as the range displays long memory and is in the stationary region in most of the cases. Based on historical data, results support that the high and low prices of equity shares are largely predictable and their forecasts can improve TA trading strategies applied on Brazilian equity shares. Further, the fractionally cointegrated approach appears as a potential forecasting tool for market practitioners on their investment strategies.