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Technical trading revisited: False discoveries, persistence tests, and transaction costs

  • Bajgrowicz, Pierre
  • Scaillet, Olivier

We revisit the apparent historical success of technical trading rules on daily prices of the Dow Jones Industrial Average index from 1897 to 2011, and we use the false discovery rate (FDR) as a new approach to data snooping. The advantage of the FDR over existing methods is that it selects more outperforming rules, which allows diversifying against model uncertainty. Persistence tests show that, even with the more powerful FDR technique, an investor would never have been able to select ex ante the future best-performing rules. Moreover, even in-sample, the performance is completely offset by the introduction of low transaction costs. Overall, our results seriously call into question the economic value of technical trading rules that has been reported for early periods.

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File URL: http://www.sciencedirect.com/science/article/pii/S0304405X1200116X
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Article provided by Elsevier in its journal Journal of Financial Economics.

Volume (Year): 106 (2012)
Issue (Month): 3 ()
Pages: 473-491

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Handle: RePEc:eee:jfinec:v:106:y:2012:i:3:p:473-491
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505576

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