Question

1. Briefly explain how “data mining” can potentially explain stock return predictability.

Answer 1

Data mining is a process of Looking through the historical behaviour of a stock by going through the database and price movement of the stock in the past.

Technical analysis is based upon various kinds of data mining which are related to the past performance of a moment of a particular stock. it can be laid through analysis of various moving averages, that a technical analyst uses to find out the direction of the stock.

fundamental analysis can also be applied in regards with data mining that when there is a certain amount of price to earning is reached, the stock goes into its overbought zone or or underbought zone and there are value buyers and sellers present .

There are various number of indicators which are used to analyse the movement of stock in the past, like volume weighted average price of the past which depicts the total volume and it relates with the movement in the price as well as technical analysts can also use them with various type of trendlines which connect to the past moment of the price.there are various resistance and support levels for a particular stocks which is to be determined using the data mining process.

it is believed that particular trend which was reflected in the past will be repeated by the stock in its future and it is always used and predicted upon by various kinds of traders whether for short-term and whether for long-term.

so it can be said that data mining is an integral part of reading into the stock price movement and determining the future movement of the stock, that will help in gaining an extraordinary rate of return and generating an Alpha.