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Naive Trading Rules in Financial Markets and Wiener-Kolmogorov Prediction Theory: A Study of "Technical Analysis."

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  • Neftci, Salih N
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    Abstract

    This article attempts a formal study of technical analysis, which is a class of informal prediction rules, often preferred to Wiener-Kolmogorov prediction theory by participants of financial markets. Yet Wiener-Kolmogorov prediction theory provides optimal linear forecasts. This article investigates two issues that may explain this contradiction. First, the article attempts to devise formal algorithms to represent various forms of technical analysis in order to see if these rules are well defined. Second, the article discusses under which conditions (if any) technical analysis might capture those properties of stock prices left unexploited by linear models of Wiener-Kolmogorov theory. Copyright 1991 by University of Chicago Press.

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    Bibliographic Info

    Article provided by University of Chicago Press in its journal Journal of Business.

    Volume (Year): 64 (1991)
    Issue (Month): 4 (October)
    Pages: 549-71
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    Handle: RePEc:ucp:jnlbus:v:64:y:1991:i:4:p:549-71

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    Cited by:
    1. Gerth, Hendrik & Niermann, Stefan, 2004. "Überrenditen durch Point and Figure-Charts: Zufall oder System?," Diskussionspapiere der Wirtschaftswissenschaftlichen Fakultät der Universität Hannover dp-302, Universität Hannover, Wirtschaftswissenschaftliche Fakultät.
    2. Alexandros E. Milionis & Evangelia Papanagiotou, 2008. "A Note on the Use of Moving Average Trading Rules to Test For Weak from Efficiency in Capital Markets," Working Papers 91, Bank of Greece.
    3. Fernando Fernández-Rodríguez & Simón Sosvilla-Rivero & Julián Andrada-Félix, . "Technical Analysis in Foreign Exchange Markets: Linear Versus Nonlinear Trading Rules," Working Papers on International Economics and Finance 00-02, FEDEA.
    4. Anton Andriyashin, 2008. "Stock Picking via Nonsymmetrically Pruned Binary Decision Trees," SFB 649 Discussion Papers SFB649DP2008-035, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
    5. F. FernAndez-RodrIguez & S. Sosvilla-Rivero & J. Andrada-FElix, 2003. "Technical analysis in foreign exchange markets: evidence from the EMS," Applied Financial Economics, Taylor and Francis Journals, vol. 13(2), pages 113-122.
    6. Nicolau, Mihaela, 2010. "Practitioners' tools in analysing financial markets evolution," MPRA Paper 25646, University Library of Munich, Germany.
    7. M. A. H. Dempster & C. M. Jones, 2002. "Can channel pattern trading be profitably automated?," European Journal of Finance, Taylor and Francis Journals, vol. 8(3), pages 275-301.
    8. Bertrand Maillet & Thierry Michel, 2000. "Further insights on the puzzle of technical analysis profitability," European Journal of Finance, Taylor and Francis Journals, vol. 6(2), pages 196-224.
    9. Foort Hamelink, 2001. "Nonlinear analysis for forecasting currencies: are they useful to the portfolio manager?," European Journal of Finance, Taylor and Francis Journals, vol. 7(4), pages 335-355.

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