Technical Trading Revisited: False Discoveries, Persistence Tests, and Transaction Costs
AbstractWe revisit the apparent historical success of technical trading rules on daily prices of the DJIA from 1897 to 2008. We use the False Discovery Rate as a new approach to data snooping. The advantage of the FDR over existing methods is that it selects more outperforming rules and di- versi es against model uncertainty. Persistence tests show that an investor would never have been able to select ex ante the future best-performing rules. Moreover, even the in-sample performance is completely oset by the introduction of transaction costs. Overall, our results seriously call into question the economic value of technical trading rules.
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Bibliographic InfoPaper provided by Swiss Finance Institute in its series Swiss Finance Institute Research Paper Series with number 08-05.
Length: 57 pages
Date of creation: May 2007
Date of revision: Jul 2009
Technical Trading; False Discovery Rate; Persistence; Transaction Costs.;
Other versions of this item:
- Bajgrowicz, Pierre & Scaillet, Olivier, 2012. "Technical trading revisited: False discoveries, persistence tests, and transaction costs," Journal of Financial Economics, Elsevier, vol. 106(3), pages 473-491.
- C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
- C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-04-12 (All new papers)
- NEP-CBA-2008-04-12 (Central Banking)
- NEP-MST-2008-04-12 (Market Microstructure)
- NEP-ORE-2008-04-12 (Operations Research)
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