Technical trading rules for nonlinear dynamics of stock returns: evidence from the G-7 stock markets

Technical trading rules for nonlinear dynamics of stock returns: evidence from the G-7 stock markets This paper explores a possible link between an asymmetric dynamic process of stock returns and profitable technical trading rules. Using the G-7 stock market indexes, we show that the dynamic process of daily index returns is better characterized by nonlinearity arising from an asymmetric reverting property. The asymmetric reverting property of stock returns is exploitable in generating profitable buy and sells signals for technical trading strategies. The bootstrap analysis shows that not all nonlinearities generate profitable buy and sell signals, but rather only the nonlinearities generating a consistent asymmetrical pattern of return dynamics can be exploitable for the profitability of the trading rules. The significant positive (negative) returns from buy (sell) signals are a consequence of trading rules that exploit the asymmetric nonlinear dynamics of the stock returns that revolve around positive (negative) unconditional mean returns under prior positive (negative) return patterns. Our results corroborate the arguments for the usefulness of technical trading strategies in stock market investments. Review of Quantitative Finance and Accounting Springer Journals

Technical trading rules for nonlinear dynamics of stock returns: evidence from the G-7 stock markets

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Springer US
Copyright © 2010 by Springer Science+Business Media, LLC
Finance; Corporate Finance; Accounting/Auditing; Econometrics; Operation Research/Decision Theory
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