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Developing a volume forecasting model

This study builds a series of models to predict trading volume in European markets using different statistical methods. The analysis considers a number of aspects, such as special events (e.g. MSCI rebalances, futures expiries, or cross-market holidays), day-of-the-week effects, and the volume-price relation asymmetry, in order to perform contextual one-step ahead prediction. We investigate the prediction error for each calendar circumstance to infer a cross-stock event-oriented switching model for volume prediction. The study concludes by proposing a stock-specific out-of-sample meta model that is fit by selecting an initial stock-specific model yielding the best performance for the most recent observations. | Journal of Applied Finance Banking vol. 7 no. 1 2017 1-40 ISSN 1792-6580 print version 1792-6599 online Scienpress Ltd 2017 Developing a Volume Forecasting Model Bogdan Batrinca1 Christian W. Hesse2 and Philip C. Treleaven3 Abstract This study builds a series of models to predict trading volume in European markets using different statistical methods. The analysis considers a number of aspects such as special events e.g. MSCI rebalances futures expiries or cross-market holidays day-of-the-week effects and the volume-price relation asymmetry in order to perform contextual one-step ahead prediction. We investigate the prediction error for each calendar circumstance to infer a cross-stock event-oriented switching model for volume prediction. The study concludes by proposing a stock-specific out-of-sample metamodel that is fit by selecting an initial stock-specific model yielding the best performance for the most recent observations. JEL classification numbers C32 C52 C53 G14 G15 Keywords Trading volume expiry day effect holiday effect behavioral finance European stock market feature selection 1 Introduction Measuring trading performance is a challenging research area but there are certain factors that have a clear influence on the overall trading performance such as the market impact which is the effect caused by a market participant who buys or sells shares consisting in the extent to which the price goes upward for a buy order or downward for a sell order. The market impact cost is defined as the difference between the actual price and the hypothetical price provided that the order was not created 1 . Market impact can move the prices adversely leading to decreased profits or turning profitable strategies into losing strategies. 1Department of Computer Science University College London Gower Street London WC1E 6BT UK. department of Computer Science University College London Gower Street London WC1E 6BT UK. department of Computer Science University College London .