Fractal Profit Landscape of the Stock Market
We investigate the structure of the profit landscape obtained from the most basic, fluctuation based, trading strategy applied for the daily stock price data. The strategy is parameterized by only two variables, p and q. Stocks are sold and bought if the log return is bigger than p and less than -q, respectively. Repetition of this simple strategy for a long time gives the profit defined in the underlying two-dimensional parameter space of p and q. It is revealed that the local maxima in the profit landscape are spread in the form of a fractal structure. The fractal structure implies that successful strategies are not localized to any region of the profit landscape and are neither spaced evenly throughout the profit landscape, which makes the optimization notoriously hard and hypersensitive for partial or limited information. The concrete implication of this property is demonstrated by showing that optimization of one stock for future values or other stocks renders worse profit than a strategy that ignores fluctuations, i.e., a long-term buy-and-hold strategy.
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Andrew Lo & Harry Mamaysky & Jiang Wang, 1999.
"Foundations of Technical Analysis: Computational Algorithms, Statistical Inference, and Empirical Implementation,"
Computing in Economics and Finance 1999
402, Society for Computational Economics.
- Andrew W. Lo & Harry Mamaysky & Jiang Wang, 2000. "Foundations of Technical Analysis: Computational Algorithms, Statistical Inference, and Empirical Implementation," Journal of Finance, American Finance Association, vol. 55(4), pages 1705-1770, 08.
- Andrew W. Lo & Harry Mamaysky & Jiang Wang, 2000. "Foundations of Technical Analysis: Computational Algorithms, Statistical Inference, and Empirical Implementation," NBER Working Papers 7613, National Bureau of Economic Research, Inc.
- Stephan Schulmeister, 2007. "The Profitability of Technical Stock Trading has Moved from Daily to Intraday Data," WIFO Working Papers 289, WIFO.
- Toth, Bence & Scalas, Enrico & Huber, Juergen & Kirchler, Michael, 2006.
"The value of information in a multi-agent market model,"
341, University Library of Munich, Germany.
- B. Tóth & E. Scalas & J. Huber & M. Kirchler, 2007. "The value of information in a multi-agent market model," The European Physical Journal B - Condensed Matter and Complex Systems, Springer, vol. 55(1), pages 115-120, 01.
- Bence Toth & Enrico Scalas & Juergen Huber & Michael Kirchler, 2006. "The value of information in a multi-agent market model," Papers physics/0610026, arXiv.org, revised Feb 2007.
- Ryan Sullivan & Allan Timmermann & Halbert White, 1999.
"Data-Snooping, Technical Trading Rule Performance, and the Bootstrap,"
Journal of Finance,
American Finance Association, vol. 54(5), pages 1647-1691, October.
- Allan Timmermann & Halbert White & Ryan Sullivan, 1998. "Data-Snooping, Technical Trading, Rule Performance and the Bootstrap," FMG Discussion Papers dp303, Financial Markets Group.
- Sullivan, Ryan & Timmermann, Allan G & White, Halbert, 1998. "Data-Snooping, Technical Trading Rule Performance and the Bootstrap," CEPR Discussion Papers 1976, C.E.P.R. Discussion Papers.
- Benoit Mandelbrot, 1963. "The Variation of Certain Speculative Prices," The Journal of Business, University of Chicago Press, vol. 36, pages 394.
- Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-54, May-June.
- Brad M. Barber & Terrance Odean, 2000. "Trading Is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors," Journal of Finance, American Finance Association, vol. 55(2), pages 773-806, 04.
When requesting a correction, please mention this item's handle: RePEc:arx:papers:1205.0505. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (arXiv administrators)
If references are entirely missing, you can add them using this form.