TITLE:
Prediction of Stock Price Movement Using Continuous Time Models
AUTHORS:
Masimba E. Sonono, Hopolang P. Mashele
KEYWORDS:
Monte Carlo, Stock Price, Geometric Brownian Motion, Variance Gamma, Maximum Likelihood Estimation, MAPE, Hit Ratio
JOURNAL NAME:
Journal of Mathematical Finance,
Vol.5 No.2,
May
22,
2015
ABSTRACT: Predicting stock price movement is generally accepted to be challenging such that until today it is continuously being attempted. This paper attempts to address the problem of stock price movement using continuous time models. Specifically, the paper provides comparative analysis of continuous time models—General Brownian Motion (GBM) and Variance Gamma (VG) in predicting the direction and accurate stock price levels using Monte Carlo methods—Quasi Monte Carlo (QMC) and Least Squares Monte Carlo (LSMC). The hit ratio and mean-absolute percentage error (MAPE) were used to evaluate the models. The empirical tests suggest that either the GBM model or VG model in any Monte Carlo method can be used to predict the direction of stock price movement. In terms of predicting the stock price values, the empirical findings suggest that the GBM model performs well in the QMC method and the VG model performs well in the LSMC method.