Irrational fads, short-term memory emulation and asset predictability

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dc.contributor.authorBEKIROS, Stelios D.
dc.date.accessioned2014-01-27T12:34:38Z
dc.date.available2014-01-27T12:34:38Z
dc.date.issued2013
dc.description.abstractOpponents of the efficient markets hypothesis argue that predictability reflects the psychological factors and “fads” of irrational investors in a speculative market. In that, conventional time series analysis often fails to give an accurate forecast for financial processes due to inherent noise patterns, fat tails, and nonlinear components. A recent stream of literature on behavioral finance has revealed that boundedly rational agents using simple rules of thumb for their decisions under uncertainty provides a more realistic description of human behavior than perfect rationality with optimal decision rules. Consequently, the application of technical analysis in trading could produce high returns. Machine learning techniques have been employed in economic systems in modeling nonlinearities and simulating human behavior. In this study, we expand the literature that evaluates return sign forecasting ability by introducing a recurrent neural network approach that combines heuristic learning and short-term memory emulation, thus mimicking the decision-making process of boundedly rational agents. We investigate the relative direction-of-change predictability of the neural network structure implied by the Lee–White–Granger test as well as compare it to other well-established models for the DJIA index. Moreover, we examine the relationship between stock return volatility and returns. Overall, the proposed model presents high profitability, in particular during “bear” market periods.en
dc.identifier.citationReview of Financial Economics, 2013, Vol. 22, No. 4, pp. 213-219en
dc.identifier.doi10.1016/j.rfe.2013.05.005
dc.identifier.endpage219en
dc.identifier.issn1058-3300
dc.identifier.issue4en
dc.identifier.startpage213en
dc.identifier.urihttps://hdl.handle.net/1814/29545
dc.identifier.volume22en
dc.language.isoenen
dc.relation.ispartofReview of Financial Economicsen
dc.titleIrrational fads, short-term memory emulation and asset predictabilityen
dc.typeArticleen
dspace.entity.typePublication
eui.subscribe.skiptrue
person.identifier.orcid0009-0009-1523-9296
person.identifier.other32390
relation.isAuthorOfPublicationba6e4237-0d85-4d9e-961f-9b714bc9252e
relation.isAuthorOfPublication.latestForDiscoveryba6e4237-0d85-4d9e-961f-9b714bc9252e
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