Forecasting the SP 500（预测标普500指数）.pdf

Reducing the Noise in Forecasting the SP 500 Sam S. Park – September 2005 sam@ Past and Present Endeavors Many academics, researchers and analysts have been searching for the Holy Grail that would correctly predict the future movements of the stock markets. People have developed everything from simple arithmetic ratios to complex algorithms to guess where markets may head in the next period. A popular forecasting method is the application of technical analysis. People have applied the Elliot Wave theory, which bases its theory on Fibonacci sequence and that prices move in a repeated pattern. Other technical analysis calculations are used to determine overbought and oversold levels. However, we do not recommend relying on technical analysis as the ONLY basis for investment decisions. Another tool utilized in forecast modeling includes the application of statistics. Multiple linear regression modeling represents a useful method to determine which independent variables explain the dependent variable (i.e. SP 500). Under this type of analysis, we assume that there is a linear relationship between the variables. Some suggest markets move in a nonlinear fashion and represent a dynamic system. The application of calculus, Chaos theory and the development of powerful computers have allowed the possibility of developing models using complex algorithms. These models suggest that markets are stochastic (highly random), however their trends may exhibit fractal properties (“self-similar” and recognizable pattern) that are sensitive to initial conditions. Some investment professionals apply neural networks (artificial intelligence software programs) to find investment opportunities. Multiple Regression With the development of statistical software packages, conducting multiple regression analysis has become relatively easy. However, some problems can occur when applying such analysis. One research concluded that three (CPI, PPI and Money Aggregate) out