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The role of Japanese Candlestick in DVAR model

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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.

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Author information

Authors and Affiliations

  1. Research Center for Applied Finance, University of International Business and Economics, Beijing, 100029, China

    Haibin Xie

  2. School of Statistics and Management, Shanghai University of Finance and Economics, Shanghai, 200433, China

    Kuikui Fan

  3. Institute of Systems Science, Academy of Mathematics and Systems Science, Chinese Academy of Sciences, Beijing, 100190, China

    Shouyang Wang

Authors
  1. Haibin Xie
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  2. Kuikui Fan
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  3. Shouyang Wang
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Corresponding author

Correspondence to Haibin Xie.

Additional information

This research was supported by the National Natural Science Foundation of China under Grant No. 71401033.

This paper was recommended for publication by Editor GAO Xiao-Shan.

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Xie, H., Fan, K. & Wang, S. The role of Japanese Candlestick in DVAR model. J Syst Sci Complex 28, 1177–1193 (2015). https://doi.org/10.1007/s11424-014-2201-2

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  • DOI: https://doi.org/10.1007/s11424-014-2201-2

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