Evidence against the Spanish stock market efficiency using the Nearest Neighbour method and a cluster forecasting technique

It is generally accepted that financial markets behave in a complex and unpredictable way, corroborating the Efficient Market Hypothesis. According to this hypothesis, investors cannot accurately predict future financial returns based on the information available. In this paper, we analyse the possibility of predicting the directional evolution of the general Spanish financial indices (IBEX 35 and IBEX Complementario). We present a novel forecasting method based on clustering techniques, and we compare it with a more conventional forecasting technique: the Nearest Neighbour (NN) method. The results suggest that it is possible to make accurate predictions in the case of the less liquid index (IBEX Complementario).