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Optimal Trend-Following Under General Persistent Return Process

In: The Ultimate Moving Average Handbook

Author

Listed:
  • Valeriy Zakamulin

    (University of Agder, Norway)

  • Javier Giner

    (University of La Laguna)

Abstract

Determining the optimal parameters of a trading rule requires specific assumptions about market dynamics and trading frictions. This chapter presents a general model of a persistent return process and identifies the optimal technical indicator for trend-following under these conditions. By explicitly modeling return persistence, we derive the optimal weighting function for past returns in a trading rule, ensuring maximum strategy performance. The analysis also incorporates transaction costs, demonstrating how they alter the properties of the optimal trend-following indicator. In particular, while the optimal return weights closely follow the structure of the return process in a frictionless market, transaction costs necessitate a smoothing adjustment to reduce excessive trading. These findings highlight the fundamental tradeoffs in designing efficient trend-following strategies, emphasizing the importance of aligning trading rules with market structure and cost considerations.

Suggested Citation

  • Valeriy Zakamulin & Javier Giner, 2025. "Optimal Trend-Following Under General Persistent Return Process," Springer Books, in: The Ultimate Moving Average Handbook, chapter 0, pages 405-431, Springer.
    • Handle: RePEc:spr:sprchp:978-3-031-90907-8_11
    DOI: 10.1007/978-3-031-90907-8_11
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