The Impact of Financial Crisis on the Predictability of the Stock Markets of PIGS Countries – Comparative Study of Prediction Accuracy of Technical Analysis and Neural Networks

• Main Authors: Katarína Hiľovská, Martina Lučkaničová, Ján Šterba
• Format: Article
• Language: English
• Published: Masaryk University 2011-09-01
• Series: Financial Assets and Investing
• Subjects: Stock return; prediction; feed-forward neural network; technical analysis; financial crisis
• Online Access: http://is.muni.cz/do/econ/soubory/aktivity/fai/27900200/FAI_issue2011_03_hilovska_luckanicova_sterba.pdf
• ISSN: 1804-5081; 1804-509X

To a degree the financial crisis influenced all European countries but the most affected are the PIGS (Portugal, Ireland, Greece and Spain). We investigated the effect of the financial crisis on the prediction accuracy of artificial neural networks on the Portuguese, Irish, Athens and Madrid Stock Exchange. We applied three-layered feed-forward neural networks with backpropagation algorithm to forecast the next day prices and we compared the paper returns achieved before and after the recent financial crisis. This method failed in forecasting the direction of the next day price movement but performed well in absolute price changes. However, it achieved better results than the strategy based on technical analysis in the period before the crisis. On the other hand, technical analysis performed better during the crisis.