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Stock index and price dynamics in the UK and the US: new evidence from a trading rule and statistical analysis

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  • Stephen Taylor
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    Abstract

    The predictability of long time series of stock index levels and stock prices is investigated using both statistical and trading rule methodologies. The trading rule analysis uses a double moving-average rule and the methods of Brock, Lakonishok and LeBaron. Results are obtained for the FTA, FTSE-100, DJIA and S&P-500 indices, prices for twelve UK stocks and indices derived from these stock prices. Statistical analysis shows that the index and price series are not random walks. The trading rule analysis generally confirms this conclusion. However, small transaction costs would eliminate the profitability of the moving-average rule. Standard ARMA-ARCH models are estimated for time series of returns and bootstrap methods are used to decide if the models can explain the observed trading statistics. The models provide a reasonable description but there is evidence from the trading rule methodology that standard models sometimes fail to describe the dynamics of the indices and prices. Several comparisons are made: between an index and the stock prices that define the index, between spot levels and futures prices for indices, and between UK and US indices.

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    File URL: http://www.tandfonline.com/doi/abs/10.1080/135184700336955
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    Bibliographic Info

    Article provided by Taylor & Francis Journals in its journal The European Journal of Finance.

    Volume (Year): 6 (2000)
    Issue (Month): 1 ()
    Pages: 39-69

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    Handle: RePEc:taf:eurjfi:v:6:y:2000:i:1:p:39-69

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    Web page: http://www.tandfonline.com/REJF20

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    Related research

    Keywords: Stock Prices; Predictability; Trading Rules; Moving Averages; Random Walk Tests; Market Efficiency; Arch Models; Dow Jones Industrial Average; Financial Times Indices;

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    1. Sweeney, Richard J, 1986. " Beating the Foreign Exchange Market," Journal of Finance, American Finance Association, vol. 41(1), pages 163-82, March.
    2. Robert F. Engle & Victor K. Ng, 1991. "Measuring and Testing the Impact of News on Volatility," NBER Working Papers 3681, National Bureau of Economic Research, Inc.
    3. Andrew W. Lo, A. Craig MacKinlay, 1988. "Stock Market Prices do not Follow Random Walks: Evidence from a Simple Specification Test," Review of Financial Studies, Society for Financial Studies, vol. 1(1), pages 41-66.
    4. Brock, W. & Lakonishok, J. & Lebaron, B., 1991. "Simple Technical Trading Rules And The Stochastic Properties Of Stock Returns," Working papers 90-22, Wisconsin Madison - Social Systems.
    5. Hendrik Bessembinder & Kalok Chan, 1998. "Market Efficiency and the Returns to Technical Analysis," Financial Management, Financial Management Association, vol. 27(2), Summer.
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    Cited by:
    1. Robert Ślepaczuk & Grzegorz Zakrzewski & Paweł Sakowski, 2012. "Investment strategies beating the market. What can we squeeze from the market?," Working Papers 2012-04, Faculty of Economic Sciences, University of Warsaw.
    2. Shynkevich, Andrei, 2013. "Time-series momentum as an intra- and inter-industry effect: Implications for market efficiency," Journal of Economics and Business, Elsevier, vol. 69(C), pages 64-85.
    3. Terence Tai-Leung Chong & Sheung Tat Chan, 2008. "Structural Change in the Efficiency of the Japanese Stock Market after the Millennium," Economics Bulletin, AccessEcon, vol. 7(7), pages 1-7.
    4. Shynkevich, Andrei, 2012. "Performance of technical analysis in growth and small cap segments of the US equity market," Journal of Banking & Finance, Elsevier, vol. 36(1), pages 193-208.
    5. repec:ebl:ecbull:v:7:y:2008:i:7:p:1-7 is not listed on IDEAS
    6. 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.
    7. Cheol-Ho Park & Scott H. Irwin, 2007. "What Do We Know About The Profitability Of Technical Analysis?," Journal of Economic Surveys, Wiley Blackwell, vol. 21(4), pages 786-826, 09.

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