Timing the Index Using Model-Based Market Forecasts

Abstract

This article contains details of a stochastic equation estimated by non-linear least squares which is used to forecast the U.K. stock market. Simulations show that the model performs well in practice. This article also contains details of a FORTRAN algorithm which includes trading rules designed to guide the practical application of the model. Simulations from the trading rules show that it is capable of improving the long-term performance of equity investment funds.