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Technical trading revisited: False discoveries, persistence tests, and transaction costs

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  • Bajgrowicz, Pierre
  • Scaillet, Olivier

Abstract

We revisit the apparent historical success of technical trading rules on daily prices of the Dow Jones Industrial Average index from 1897 to 2011, and we use the false discovery rate (FDR) as a new approach to data snooping. The advantage of the FDR over existing methods is that it selects more outperforming rules, which allows diversifying against model uncertainty. Persistence tests show that, even with the more powerful FDR technique, an investor would never have been able to select ex ante the future best-performing rules. Moreover, even in-sample, the performance is completely offset by the introduction of low transaction costs. Overall, our results seriously call into question the economic value of technical trading rules that has been reported for early periods.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Financial Economics.

Volume (Year): 106 (2012)
Issue (Month): 3 ()
Pages: 473-491

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Handle: RePEc:eee:jfinec:v:106:y:2012:i:3:p:473-491

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Web page: http://www.elsevier.com/locate/inca/505576

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Keywords: Technical trading; False discovery rate; Persistence; Transaction costs;

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Citations

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Cited by:
  1. Aitken, Michael & Cumming, Douglas & Zhan, Feng, 2013. "High frequency trading and end-of-day price dislocation," CFS Working Paper Series 2013/16, Center for Financial Studies (CFS).
  2. Dan Anghel, 2013. "How Reliable is the Moving Average Crossover Rule for an Investor on the Romanian Stock Market?," The Review of Finance and Banking, Academia de Studii Economice din Bucuresti, Romania / Facultatea de Finante, Asigurari, Banci si Burse de Valori / Catedra de Finante, vol. 5(2), pages 089-115, December.
  3. David Ardia & Kris Boudt, 2013. "The Peer Performance of Hedge Funds," Cahiers de recherche 1329, CIRPEE.
  4. Fang, Jiali & Jacobsen, Ben & Qin, Yafeng, 2014. "Predictability of the simple technical trading rules: An out-of-sample test," Review of Financial Economics, Elsevier, vol. 23(1), pages 30-45.

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