Development of Frequency Analysis of the Volatility in a Model to Forecast the Financial Markets Trend and Comparative Empirical Assessment with the Technical Analysis

Authors
  • STEFAN SIMEONOV
    • Tsenov academy of economics

  • Teodor Todorov
    • Department of Finance and Credit at D. A. Tsenov Academy of Economics

  • Daniel Nikolaev
    • D. A. Tsenov Academy of Economics – Svishtov The Department of Finance and Credit

Keywords
forecasting the market trend, Modified Frequency Analysis of Volatility and Trend with Movable Calculating, technical indicators, stock exchange profile, stock exchange indexes

Summary
The present study aims to develop the concept of predictive applicability of the Frequency Analysis of the Volatility and Trend (FAVT) as well as practical testing of the modified model for forecasting stock exchange indexes with different characteristics. For greater objectivity in estimating the forecast outcomes, FAVT is placed in parallel with traditional statistical models and the most popular method in stock exchange traders - technical analysis. In the first part of the study we develop the methodology of the concept of predictive applicability of FAVT in its modified version with movable calculation (FAVT-MC) of the frequency coefficients. The methodology of the study includes investment analysis measures, traditional statistical forecasting models, quantitative indicators of technical analysis and a modified version of the FAVT-MC. The conclusions of the statistical analysis show low applicability of linear forecasting in determining changes in the trend, while the alternative approach – non-linear forecasting yields significantly better results but under conditions of high investment activity and large variation. The choice of technical analysis tools is deliberately placed on quantitative measures known as technical indicators and does not include Eliot's Wave Theory. The results found are of varying reliability for the over ten technical indicators applied.

Exploration of the forecasting significance of the FAVT with movable calculation for the main (long-term) trends on stock exchange indexes achieved results with a reliable signal value for the end of the large growth before the general stock market collapse at the end of 2007. Clearly unambiguous results for all the periods surveyed in the performance of the different stock indices regarding the change of their major trends after the 2008 crisis were not established. A more significant importance of the modified frequency analysis, allowing the reading of forecast signals, is established for the short-term trends of the stock exchange indices.

JEL: G17, G14, C13, C00
Pages: 34
DOI: 

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