The Effect of the Nikkei and the S&P on the All-Ordinaries: A Comparison of Three Models

Abstract

This paper examines the influence of shocks in the Japanese Nikkei Index and in the US S&P Index on the Australian All-Ordinaries Index. We present results from the application of three models-an autoregressive linear model, a GARCH-M model and a non-linear neural network model. According to standard forecast statistics, a restricted feedforward neural network model, incorporating parallel processing of information specified by time-zones, out-performs the linear and GARCH-M models. However, according to the Diebold-Mariano test of forecast accuracy, the mean loss differential between the neural network and the linear model is not statistically different from zero, while that between the neu..