Naive Trading Rules in Financial Markets and Wiener-Kolmogorov Prediction Theory: A Study of "Technical Analysis."
This article attempts a formal study of technical analysis, which is a class of informal prediction rules, often preferred to Wiener-Kolmogorov prediction theory by participants of financial markets. Yet Wiener-Kolmogorov prediction theory provides optimal linear forecasts. This article investigates two issues that may explain this contradiction. First, the article attempts to devise formal algorithms to represent various forms of technical analysis in order to see if these rules are well defined. Second, the article discusses under which conditions (if any) technical analysis might capture those properties of stock prices left unexploited by linear models of Wiener-Kolmogorov theory. Copyright 1991 by University of Chicago Press.
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