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Journal of Systems Science and Complexity

, Volume 28, Issue 5, pp 1177–1193 | Cite as

The role of Japanese Candlestick in DVAR model

  • Haibin XieEmail author
  • Kuikui Fan
  • Shouyang Wang
Article

Abstract

The decomposition-based vector autoregressive model (DVAR) provides a new framework for scrutinizing the efficiency of technical analysis in forecasting stock returns. However, its relationships with other technical indicators still remain unknown. This paper investigates the relationships of DVAR model with the Japanese Candlestick indicators using simulations, theoretical explanations and empirical studies. The main finding of this paper is that both lower and upper shadows in Japanese Candlestick Granger contribute to the DVAR model explanation power, and thus, providing useful information for improving the DVAR forecasts. This finding makes sense as it means that the information contained in the lower and upper shadows should be used when modeling the stock returns with DVAR. Empirical studies performed on China SSEC stock index demonstrate that DVAR model with upper and lower shadows as exogenous variables does have informative and valuable out-of-sample forecasts.

Keywords

Chinese stock market Japanese candlestick stock market forecast technical analysis 

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Copyright information

© Institute of Systems Science, Academy of Mathematics and Systems Science, CAS and Springer-Verlag Berlin Heidelberg 2015

Authors and Affiliations

  1. 1.Research Center for Applied FinanceUniversity of International Business and EconomicsBeijingChina
  2. 2.School of Statistics and ManagementShanghai University of Finance and EconomicsShanghaiChina
  3. 3.Institute of Systems Science, Academy of Mathematics and Systems ScienceChinese Academy of SciencesBeijingChina

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