Analyzing Returns and Pattern of Financial Data Using Log-linear Modeling

Abstract

Technical analysis is useful for forecasting the price movement through the analysis of historic data. This sort of movement has Turn of the year effect also and useful for short term prediction. If the direction of price of two or more assets is same, it becomes necessary to analyze the returns also. We first use optimal band to predict the direction of price and create a contingency table of the data to analyze the pattern (movement) against returns. We use log-linear modeling for the analysis of the contingency table. We next include the volume of transactions as one more variable in the contingency table. The table consisting of three variables, Pattern, Returns and Volume is further analyzed by using log-linear modeling. We test various hypotheses of association for these variables by using Chi-square test for contingency tables.