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An Empirical Evaluation of Non-Linear Trading Rules

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  • Julián Andrada-Félix
  • Fernando Fernández-Rodríguez
  • María Dolores García-Artiles
  • Simón Sosvilla-Rivero

Abstract

In this paper we investigate the profitability of non-linear trading rules based on nearest neighbour predictors. Our results, based on applying this investment strategy to the New York Stock Exchange, suggest that, taking into account trading costs, the non-linear trading rule is superior to a risk-adjusted buy-and-hold strategy (both in terms of returns and of Sharpe ratios) for the 1998 and 1999 periods of upward trend. In contrast, for the relatively "stable" market period of 2000, we found that both strategies generate equal returns, although the risk-adjusted buy-and-hold strategy yields a higher Sharpe ratio.

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  • Julián Andrada-Félix & Fernando Fernández-Rodríguez & María Dolores García-Artiles & Simón Sosvilla-Rivero, "undated". "An Empirical Evaluation of Non-Linear Trading Rules," Working Papers 2001-16, FEDEA.
    • Handle: RePEc:fda:fdaddt:2001-16
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    References listed on IDEAS

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    1. Fernando Fernandez-Rodriguez & Simon Sosvilla-Rivero & Maria Dolores Garcia-Artiles, 1997. "Using nearest neighbour predictors to forecast the Spanish stock market," Investigaciones Economicas, Fundación SEPI, vol. 21(1), pages 75-91, January.
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    11. F. FernAndez-RodrIguez & S. Sosvilla-Rivero & J. Andrada-FElix, 2003. "Technical analysis in foreign exchange markets: evidence from the EMS," Applied Financial Economics, Taylor & Francis Journals, vol. 13(2), pages 113-122.
    12. Fernandez-Rodriguez, Fernando & Gonzalez-Martel, Christian & Sosvilla-Rivero, Simon, 2000. "On the profitability of technical trading rules based on artificial neural networks:: Evidence from the Madrid stock market," Economics Letters, Elsevier, vol. 69(1), pages 89-94, October.
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    Cited by:

    1. Mario Izquierdo & Omar Licandro & Alberto Maydeu, 2001. "Car quality improvements and price indices in Spain," Estudios Económicos, Banco de España, number 72.
    2. Kian-Ping Lim & Muzafar Shah Habibullah & Melvin J. Hinich, 2009. "The Weak-form Efficiency of Chinese Stock Markets," Journal of Emerging Market Finance, Institute for Financial Management and Research, vol. 8(2), pages 133-163, May.
    3. Chong, Terence Tai-Leung & Lam, Tau-Hing & Yan, Isabel Kit-Ming, 2012. "Is the Chinese stock market really inefficient?," China Economic Review, Elsevier, vol. 23(1), pages 122-137.
    4. 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.
    5. repec:ebl:ecbull:v:7:y:2008:i:7:p:1-7 is not listed on IDEAS
    6. Hanias, M.P. & Tombras, G.S., 2009. "Time series cross prediction in a single transistor chaotic circuit," Chaos, Solitons & Fractals, Elsevier, vol. 41(3), pages 1167-1173.

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