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Detailed study of a moving average trading rule

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Autor(es):
Ferreira, Fernando F. [1] ; Silva, A. Christian [2] ; Yen, Ju-Yi [3]
Número total de Autores: 3
Afiliação do(s) autor(es):
[1] Univ Sao Paulo, Ctr Interdisciplinary Res Complex Syst, BR-03828000 Sao Paulo - Brazil
[2] IdataFactory, Houston, TX 77030 - USA
[3] Univ Cincinnati, Dept Math Sci, Cincinnati, OH 45221 - USA
Número total de Afiliações: 3
Tipo de documento: Artigo Científico
Fonte: QUANTITATIVE FINANCE; v. 18, n. 9, SI, p. 1599-1617, 2018.
Citações Web of Science: 0
Resumo

We present a detailed study of the performance of a trading rule that uses moving averages 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 proposes a non-stationary model to account for such oscillations. (AU)

Processo FAPESP: 13/18942-2 - Estudo de fenômenos coletivos em sistemas físicos e biológicos
Beneficiário:Fernando Fagundes Ferreira
Linha de fomento: Auxílio à Pesquisa - Regular