Cross-correlation and the predictability of financial return series

This paper examines whether we can improve the predictability of financial return series by exploiting the effect of cross-correlations among different financial markets We forecast financial return series based on the support vector machines (SVM) method which can surpass the random-walk model consistently By comparing the mean absolute errors and the root mean squared errors we show that it is hard to improve the predictability of financial return series by incorporating correlated return series into SVM-based forecasting models even though there are Granger causal relationships among them (C) 2010 Elsevier B V All rights reserved