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On the profitability of technical trading rules based on arifitial neural networks : evidence from the Madrid stock market

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  • Fernando Fernández-Rodríguez
  • Christian González-Martel*
  • Simón Sosvilla-Rivero

Abstract

In this paper we investigate the profitability of a simple technical trading rule based on Artificial Neural Networks (ANNs). Our results, based on applying this investment strategy to the General Index of the Madrid Stock Market, suggest that, in absence of trading costs, the technical trading rule is always superior to a buy-and-hold strategy for both "bear" market and "stable" market episodes. On the other hand, we find that the buy-and-hold strategy generates higher returns than the trading rule based on ANN only for a "bull" market subperiod.

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Paper provided by FEDEA in its series Working Papers with number 99-07.

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Handle: RePEc:fda:fdaddt:99-07

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Keywords: Technical trading rules; Neural network models; Security markets;

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  1. Fama, Eugene F, 1991. " Efficient Capital Markets: II," Journal of Finance, American Finance Association, American Finance Association, vol. 46(5), pages 1575-617, December.
  2. Gencay Ramazan & Stengos Thanasis, 1997. "Technical Trading Rules and the Size of the Risk Premium in Security Returns," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, De Gruyter, vol. 2(2), pages 1-14, July.
  3. Brock, W. & Lakonishok, J. & Lebaron, B., 1991. "Simple Technical Trading Rules And The Stochastic Properties Of Stock Returns," Working papers, Wisconsin Madison - Social Systems 90-22, Wisconsin Madison - Social Systems.
  4. LeBaron, B., 1992. "Do Moving Average Trading Rule Results Imply Nonlinearites in Foreign Exchange Markets?," Working papers, Wisconsin Madison - Social Systems 9222, Wisconsin Madison - Social Systems.
  5. LeBaron, Blake, 1999. "Technical trading rule profitability and foreign exchange intervention," Journal of International Economics, Elsevier, Elsevier, vol. 49(1), pages 125-143, October.
  6. 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, Fundación SEPI, vol. 21(1), pages 75-91, January.
  7. Pesaran, M Hashem & Timmermann, Allan, 1992. "A Simple Nonparametric Test of Predictive Performance," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 10(4), pages 561-65, October.
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