Detailed study of a moving average trading rule

DOI10.1080/14697688.2017.1417621zbMATH Open1483.91221arXiv1907.00212OpenAlexW2791387620MaRDI QIDQ5026541FDOQ5026541

Authors: F. F. Ferreira, A. Christian Silva, Ju-Yi Yen 

Publication date: 8 February 2022

Published in: Quantitative Finance (Search for Journal in Brave)

Abstract: We present a detailed study of the performance of a trading rule that uses moving average of past returns to predict future returns on stock indexes. Our main goal is to link performance and the stochastic process of the traded asset. Our study reports short, medium and long term effects by looking at the Sharpe ratio (SR). We calculate the Sharpe ratio of our trading rule as a function of the probability distribution function of the underlying traded asset and compare it with data. We show that if the performance is mainly due to presence of autocorrelation in the returns of the traded assets, the SR as a function of the portfolio formation period (look-back) is very different from performance due to the drift (average return). The SR shows that for look-back periods of a few months the investor is more likely to tap into autocorrelation. However, for look-back larger than few months, the drift of the asset becomes progressively more important. Finally, our empirical work reports a new long-term effect, namely oscillation of the SR and propose a non-stationary model to account for such oscillations.

Full work available at URL: https://arxiv.org/abs/1907.00212

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• scientific article; zbMATH DE number 1304906

zbMATH Keywords

Sharpe ratiotime series analysismoving averagestrading strategiesmomentum strategiesinvestment strategiesreversal strategies

Mathematics Subject Classification ID

Applications of statistics to actuarial sciences and financial mathematics (62P05) Financial markets (91G15)

Cites Work

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Cited In (4)

• An improved moving average technical trading rule
• Decomposing the predictive performance of the moving average trading rule of technical analysis: the contribution of linear and non-linear dependencies in stock returns
• A theoretical analysis of trading rules: an application to the moving average case with Markovian returns
• Theoretical and practical motivations for the use of the moving average rule in the stock market

Uses Software

• R
• fpp

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