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Spurious Regressions in Technical Trading: Momentum or Contrarian?

Author

Listed:
  • Mototsugu Shintani

    (Department of Economics, Vanderbilt University, and Economist, Institute for Monetary and Economic Studies, Bank of Japan (E-mail: mototsugu.shintani@vanderbilt.edu, mototsugu.shintani@boj.or.jp))

  • Tomoyoshi Yabu

    (Assistant Professor, Graduate School of Systems and Information Engineering, University of Tsukuba (E-mail: tyabu@sk.tsukuba.ac.jp))

  • Daisuke Nagakura

    (Economist, Institute for Monetary and Economic Studies, Bank of Japan (E-mail: daisuke.nagakura@boj.or.jp))

Abstract

This paper investigates the spurious effect in forecasting asset returns when signals from technical trading rules are used as predictors. Against economic intuition, the simulation result shows that, even if past information has non predictive power, buy or sell signals based on the difference between the short-period and long-period moving averages of past asset prices can be statistically significant when the forecast horizon is relatively long. The theory implies that both ' momentum' and 'contrarian' strategies can be falsely supported, while the probability of obtaining each result depends on the type of the test statistics employed. Several modifications to these test statistics are considered for the purpose of avoiding spurious regressions. They are applied to the stock market index and the foreign exchange rate in order to reconsider the predictive power of technical trading rules.

Suggested Citation

  • Mototsugu Shintani & Tomoyoshi Yabu & Daisuke Nagakura, 2008. "Spurious Regressions in Technical Trading: Momentum or Contrarian?," IMES Discussion Paper Series 08-E-09, Institute for Monetary and Economic Studies, Bank of Japan.
  • Handle: RePEc:ime:imedps:08-e-09
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    File URL: http://www.imes.boj.or.jp/research/papers/english/08-E-09.pdf
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    References listed on IDEAS

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    Cited by:

    1. Shintani, Mototsugu & Yabu, Tomoyoshi & Nagakura, Daisuke, 2012. "Spurious regressions in technical trading," Journal of Econometrics, Elsevier, vol. 169(2), pages 301-309.

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    More about this item

    Keywords

    Efficient market hypothesis; Nonstationary time series; Random walk; Technical analysis;
    All these keywords.

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C25 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions; Probabilities
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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