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Information as an explanatory variable

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  • Alvaro Montenegro

Abstract

This article explores the use of information-theoretic explanatory variables in stock price forecasting regressions. Stock price changes, as the dependent variable, is run against traditional explanatory variables such as lags of price changes and lags of the squares of the price changes. The addition of lags of a variable related to the information content of the price changes is shown to significantly improve the explanatory power. This exercise should encourage the use of information related variables in forecasting financial markets.

Suggested Citation

  • Alvaro Montenegro, 2012. "Information as an explanatory variable," Applied Financial Economics, Taylor & Francis Journals, vol. 22(5), pages 351-356, March.
    • Handle: RePEc:taf:apfiec:v:22:y:2012:i:5:p:351-356
    DOI: 10.1080/09603107.2011.613759
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    1. Maasoumi, Esfandiar & Racine, Jeff, 2002. "Entropy and predictability of stock market returns," Journal of Econometrics, Elsevier, vol. 107(1-2), pages 291-312, March.
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    3. Chordia, Tarun & Roll, Richard & Subrahmanyam, Avanidhar, 2005. "Evidence on the speed of convergence to market efficiency," Journal of Financial Economics, Elsevier, vol. 76(2), pages 271-292, May.
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