Fourier Transformation on Model Fitting for Sri Lankan Share Market Returns

W.G. S. Konarasinghe; N. R. Abeynayake

Volume : IV, Issue : I, January - 2015

Fourier Transformation on Model Fitting for Sri Lankan Share Market Returns

W. G. S. Konarasinghe, N. R. Abeynayake

Abstract :

Sri Lankan share market returns have wave like patterns. A wave can be viewed either in time domain or in the frequency domain. The frequency domain analysis is known as Spectral Analysis or Fourier analysis. This study was focused on applying Fourier transformation on model fitting for stock returns of Sri Lankan share market. Also it was intended to compare the forecasting ability of above models and Auto Regressive Integrated Moving Average (ARIMA). First Fourier transformation was used to transform monthly returns to series of trigonometric series and multiple regression analysis was used for estimating amplitudes. Monthly returns also were analyzed by ARIMA. Root Mean Square Errors of models fitted with spectral analysis were less than those of ARIMA models. It was concluded that Fourier transformation along with multiple regressions are suitable for forecasting individual company returns of Sri Lankan share market.