Academic journal article Business: Theory and Practice

Smoothing Techniques for Market Fluctuation signals/I Lyginimo Metodu Taikymas Rinkos Svyravimams Prognozuoti

Academic journal article Business: Theory and Practice

Smoothing Techniques for Market Fluctuation signals/I Lyginimo Metodu Taikymas Rinkos Svyravimams Prognozuoti

Article excerpt

1. Introduction

Investment decision-making is often based on the following three dimensions: value, time and risk. The main characteristic of the stock market is its dynamic condition, so value and risk are the measures which can only be forecasted but not known exactly in advance. Financial crisis in the beginning of the 21st century was caused by crashes in stock markets. Nowadays economists analyze the current financial crisis and try to find the main reasons why the world economy constantly suffers from booms and busts (Dzikevicius, Zamzickas 2009). Racickas and Vasiliauskaite (2010) identified one of the major financial crisis depth indicators. It is the country's stock market indexes. Stock market index observation allows determining current stock market situation. If Academia finds the appropriate way to forecast at least exact market trend or its fluctuation signals, the subsequence of such financial crisis as the world has seen in the 21st century can be more opportune for the further financial markets and national economic development. As the globalization processes are spread widely between different countries, the crash of one stock market causes the influence on other stock markets in other countries.

The events of the last two years indicated the principles of investors' behaviour: an inadequate risk assessment, the desire to obtain abnormal returns, the orientation of short-term investment horizons or the speculation. Such attitude skews stock market trends and its behavior. As the investment process is an important part of investment banks', insurance companies', etc. activity, it should involve more efficient and accurate forecasting methods. So the aim of this study is to find out more appropriate forecasting techniques suitable to indicate the fluctuations of the stock market. The previous study (Dzikevicius et al. 2010) was based on analysis of simple Technical Analysis (further TA) rules. The results implied that application of simple trading rules to forecast stock prices can generate significant forecasted value errors and deviations from real prices and it is not appropriate to generate price movement trends. The continuous research (Dzikevicius, Saranda 2010) was the first academia research of using TA to predict the values for OMX Baltic Benchmark Index and compare it with S&P 500 Index of US using an exponential smoothing method--the exponential moving average (further--the EMA). The results were affirmative: the exponential smoothing method was appropriate to indicate the future values of S&P 500 and OMX Baltic Benchmark indexes. With the reference to previous researches smoothing techniques will be tested again to decide whether it is a powerful tool to forecast stock market fluctuation signals. The OMX Baltic Benchmark PI Index and related sector indexes are the objects to be forecasted to find out the trend of the Baltic region stock markets.

2. The review of applied forecasting and risk evaluation methods

Investors' endeavor that the value of assets held steady improves. In addition they are interested in not just increase in the value but also the speed of value growth. Only initial asset price is known. Two dimensions such as final asset price and current profit are unknown (Rutkauskas, Martinkute 2007). Technical factors are related to the securities market which focuses on the evolution of prices and trade circulation, demand and supply factors. An important statistical tool which allows identifying the market conditions is an equity index (Norvaisiene 2005). In our case OMX Baltic Benchmark PI index is a statistical stock market price dynamics measure tool. Securities market is still relatively new for individual investors. As the new type of investors such as an individual investor appeared in the stock market, a huge flow of information on the investment management and assessment issue is needed (Jureviciene 2008). Growing stock market and rising activity of the investors attracts more growing attention (Dudzeviciute 2004). …

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