A real-time trading rule
AbstractIf prices of assets are not aligned to their net present value, a trading strategy may be implemented when actual prices revert to fundamentals. A real-time trading strategy is introduced based on the assumption that reversion occurs in later periods. The fundamental price is constructed in real time using the net present value approach which requires the series for expected dividends, expected returns and expected dividend growth rate. These series, typically unobservable, are derived from a structural state space model. A battery of tests comparing the rule to the passive Buy and Hold Strategy illustrates that the rule is marginally better for shorter horizons.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 27148.
Date of creation: 06 Jun 2010
Date of revision:
Trading Rule; Net Present Value; State Space Modeling;
Find related papers by JEL classification:
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-12-18 (All new papers)
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