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A Comprehensive Test of Futures Market Disequilibrium

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  • Lukac, Louis P
  • Brorsen, B Wade

Abstract

Whether or not trading with technical analysis is profitable is a controversial topic. This study seeks to add to our knowledge about this controversy by providing a comprehensive test of the profitability of technical trading systems. Trading is simulated for 23 trading systems on 30 futures markets for 11 years. All but two trading systems had significant gross returns. Thus, the results strongly reject the random walk model and suggest that disequilibrium models more appropriately describe daily futures prices. Although returns were less than expected by many users of these systems, several systems did generate returns significantly above transaction costs. The results for net returns are not conclusive, but they suggest there may be causes of disequilibrium beyond transaction costs. No conclusion is made about market efficiency since possible causes of disequilibrium beyond transaction costs exist. Copyright 1990 by MIT Press.

Suggested Citation

  • Lukac, Louis P & Brorsen, B Wade, 1990. "A Comprehensive Test of Futures Market Disequilibrium," The Financial Review, Eastern Finance Association, vol. 25(4), pages 593-622, November.
    • Handle: RePEc:bla:finrev:v:25:y:1990:i:4:p:593-622
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    Cited by:

    1. Montgomery, William & Raza, Ahmad & Ülkü, Numan, 2019. "Tests of technical trading rules and the 52-week high strategy in the corporate bond market," Global Finance Journal, Elsevier, vol. 40(C), pages 85-103.
    2. Carl R. Zulauf & Scott H. Irwin, 1998. "Market Efficiency and Marketing to Enhance Income of Crop Producers," Review of Agricultural Economics, Agricultural and Applied Economics Association, vol. 20(2), pages 308-331.
    3. Poitras, Geoffrey, 1998. "TED Tandems: Arbitrage Restrictions and the US Treasury Bill/Eurodollar Futures Spread," International Review of Economics & Finance, Elsevier, vol. 7(3), pages 255-276.
    4. Elfakhani, Said & Wionzek, Ritchie J., 1997. "Intermarket spread opportunities between Canadian and American agricultural futures," International Review of Economics & Finance, Elsevier, vol. 6(4), pages 361-377.
    5. Szakmary, Andrew C. & Shen, Qian & Sharma, Subhash C., 2010. "Trend-following trading strategies in commodity futures: A re-examination," Journal of Banking & Finance, Elsevier, vol. 34(2), pages 409-426, February.
    6. Chiang, Mi-Hsiu & Chiu, Hsin-Yu & Kuo, Wei-Yu, 2021. "Predictive ability of similarity-based futures trading strategies," Pacific-Basin Finance Journal, Elsevier, vol. 68(C).
    7. Lien, Donald & Yang, Li, 2008. "Asymmetric effect of basis on dynamic futures hedging: Empirical evidence from commodity markets," Journal of Banking & Finance, Elsevier, vol. 32(2), pages 187-198, February.
    8. Park, Cheol-Ho & Irwin, Scott H., 2004. "The Profitability Of Technical Trading Rules In Us Futures Markets: A Data Snooping Free Test," 2004 Conference, April 19-20, 2004, St. Louis, Missouri 19011, NCR-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management.
    9. Kin Lam & Li Wei, "undated". "Optimal Trading Strategy When Return Process is AR(1)," Computing in Economics and Finance 1997 16, Society for Computational Economics.
    10. Elfakhani, Said & Visiting Professor & Wionzek, Ritchie J. & Chaudhury, Mohammed, 1999. "Thin trading and mispricing profit opportunities in the Canadian commodity futures," The Quarterly Review of Economics and Finance, Elsevier, vol. 39(1), pages 37-58.
    11. Chiu, Hsin-Yu & Chiang, Mi-Hsiu & Kuo, Wei-Yu, 2018. "Predicative Ability of Similarity-based Futures Trading Strategies," IRTG 1792 Discussion Papers 2018-045, Humboldt University of Berlin, International Research Training Group 1792 "High Dimensional Nonstationary Time Series".
    12. Kidd, Willis V. & Brorsen, B. Wade, 2004. "Why have the returns to technical analysis decreased?," Journal of Economics and Business, Elsevier, vol. 56(3), pages 159-176.
    13. Joni M. Klumpp & B. Wade Brorsen & Kim B. Anderson, 2008. "Market Advisory Service Recommendations and Wheat Producers' Selling Decisions," Canadian Journal of Agricultural Economics/Revue canadienne d'agroeconomie, Canadian Agricultural Economics Society/Societe canadienne d'agroeconomie, vol. 56(1), pages 117-128, March.
    14. Cheol‐Ho Park & Scott H. Irwin, 2007. "What Do We Know About The Profitability Of Technical Analysis?," Journal of Economic Surveys, Wiley Blackwell, vol. 21(4), pages 786-826, September.
    15. Valeriy Zakamulin, 2014. "The real-life performance of market timing with moving average and time-series momentum rules," Journal of Asset Management, Palgrave Macmillan, vol. 15(4), pages 261-278, August.
    16. Tsung-Hsun Lu & Yung-Ming Shiu, 2012. "Tests for Two-Day Candlestick Patterns in the Emerging Equity Market of Taiwan," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 48(0), pages 41-57, January.
    17. Shynkevich, Andrei, 2012. "Performance of technical analysis in growth and small cap segments of the US equity market," Journal of Banking & Finance, Elsevier, vol. 36(1), pages 193-208.
    18. Cheol‐Ho Park & Scott H. Irwin, 2010. "A reality check on technical trading rule profits in the U.S. futures markets," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 30(7), pages 633-659, July.
    19. C. L. Dunis & Jason Laws & Ben Evans, 2006. "Trading futures spreads: an application of correlation and threshold filters," Applied Financial Economics, Taylor & Francis Journals, vol. 16(12), pages 903-914.
    20. Ryan Flugum, 2021. "The trend is an analyst's friend: Analyst recommendations and market technicals," The Financial Review, Eastern Finance Association, vol. 56(2), pages 301-330, May.
    21. Robert Ślepaczuk & Grzegorz Zakrzewski & Paweł Sakowski, 2012. "Investment strategies beating the market. What can we squeeze from the market?," Working Papers 2012-04, Faculty of Economic Sciences, University of Warsaw.
    22. Marshall, Ben R. & Cahan, Rochester H. & Cahan, Jared M., 2008. "Can commodity futures be profitably traded with quantitative market timing strategies?," Journal of Banking & Finance, Elsevier, vol. 32(9), pages 1810-1819, September.
    23. Klumpp, Joni M. & Brorsen, B. Wade & Anderson, Kim B., 2005. "The Impact of Marketing Strategy Information on the Producer's Selling Decision," 2005 Conference, April 18-19, 2005, St. Louis, Missouri 19036, NCR-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management.
    24. Ślepaczuk Robert & Sakowski Paweł & Zakrzewski Grzegorz, 2018. "Investment Strategies that Beat the Market. What Can We Squeeze from the Market?," Financial Internet Quarterly (formerly e-Finanse), Sciendo, vol. 14(4), pages 36-55, December.

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