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

Author

Listed:
  • Pierre Bajgrowicz

    (University of Geneva)

  • Olivier Scaillet

    (University of Geneva and Swiss Finance Institute)

Abstract

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.

Suggested Citation

  • Pierre Bajgrowicz & Olivier Scaillet, 2008. "Technical Trading Revisited: False Discoveries, Persistence Tests, and Transaction Costs," Swiss Finance Institute Research Paper Series 08-05, Swiss Finance Institute, revised Jul 2009.
    • Handle: RePEc:chf:rpseri:rp0805
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    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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