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Technical Trading Revisited: False Discoveries, Persistence Tests, and Transaction Costs

  • Pierre Bajgrowicz

    (University of Geneva)

  • Olivier Scaillet

    (University of Geneva and Swiss Finance Institute)

We revisit the apparent historical success of technical trading rules on daily prices of the DJIA from 1897 to 2008. We use the False Discovery Rate as a new approach to data snooping. The advantage of the FDR over existing methods is that it selects more outperforming rules and di- versi es against model uncertainty. Persistence tests show that an investor would never have been able to select ex ante the future best-performing rules. Moreover, even the in-sample performance is completely o set by the introduction of transaction costs. Overall, our results seriously call into question the economic value of technical trading rules.

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Paper provided by Swiss Finance Institute in its series Swiss Finance Institute Research Paper Series with number 08-05.

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Length: 57 pages
Date of creation: May 2007
Date of revision: Jul 2009
Handle: RePEc:chf:rpseri:rp0805
Contact details of provider: Web page: http://www.SwissFinanceInstitute.ch
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