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JACIII Vol.24 No.4 pp. 477-487
doi: 10.20965/jaciii.2020.p0477
(2020)

Paper:

Predictability of China’s Stock Market Returns Based on Combination of Distribution Forecasting Models

Yanyun Yao*, Xiutian Zheng**,†, and Huimin Wang*

*Department of Applied Statistics, Shaoxing University
900 Chengnan Avenue, Yuecheng District, Shaoxing, Zhejiang 312000, China

**Department of Economics, Hangzhou Normal University Qianjiang College
16 Xuelin Street, Xiasha University Town, Hangzhou, Zhejiang 310018, China

Corresponding author

Received:
October 25, 2019
Accepted:
January 12, 2020
Published:
July 20, 2020
Keywords:
predictability, distribution forecasting, model combination, GARCH, nonparametric
Abstract
Predictability of China’s Stock Market Returns Based on Combination of Distribution Forecasting Models

Marginal calibration charts of SHCI and SZCI

No consensus exists in the literature on whether stock prices can be predicted, with most existing studies employing point forecasting to predict returns. By contrast, this study adopts the new perspective of distribution forecasting to investigate the predictability of the stock market using the model combination strategy. Specifically, the Shanghai Composite Index and the Shenzhen Component Index are selected as research objects. Seven models – GARCH-norm, GARCH-sstd, EGARCH-sstd, EGARCH-sstd-M, one-component Beta-t-EGARCH, two-component Beta-t-EGARCH, and the EWMA-based nonparametric model – are employed to perform distribution forecasting of the returns. The results of out-of-sample forecasting evaluation show that none of the individual models is “qualified” in terms of predictive power. Therefore, three combinations of individual models were constructed: equal weight combination, log-likelihood score combination, and continuous ranked probability score combination. The latter two combinations were found to always have significant directional predictability and excess profitability, which indicates that the two combined models may be closer to the real data generation process; from the perspective of economic evaluation, they may have a predictive effect on the conditional return distribution in China’s stock market.

Cite this article as:
Y. Yao, X. Zheng, and H. Wang, “Predictability of China’s Stock Market Returns Based on Combination of Distribution Forecasting Models,” J. Adv. Comput. Intell. Intell. Inform., Vol.24, No.4, pp. 477-487, 2020.
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Last updated on Dec. 03, 2020