Technical trading revisited: False discoveries, persistence tests, and transaction costs

Bajgrowicz, Pierre; Scaillet, Olivier

doi:10.1016/j.jfineco.2012.06.001

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Title		Technical trading revisited: False discoveries, persistence tests, and transaction costs
Authors		Bajgrowicz, Pierre Scaillet, Olivier
Published in		Journal of financial economics. 2012, vol. 106, no. 3, p. 473-491
Abstract		We revisit the apparent historical success of technical trading rules on daily prices of the DJIA index from 1897 to 2011, and 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 which allows diversifying against model uncertainty. Persistence tests show that, even with the more powerful FDR technique, an investor would never have been able to select ex ante the future best-performing rules. Moreover, even in-sample, the performance is completely offset by the introduction of low transaction costs. Overall, our results seriously call into question the economic value of technical trading rules that has been reported for early periods.
Keywords		Technical Trading — False Discovery Rate — Persistence — Transaction Costs
Identifiers		DOI: 10.1016/j.jfineco.2012.06.001
Full text		Article (Accepted version) (968 Kb) - Free access Other version: http://linkinghub.elsevier.com/retrieve/pii/S0304405X1200116X
Structures		Faculté d'économie et de management
Research group		Geneva Finance Research Institute (GFRI)
Citation (ISO format)		BAJGROWICZ, Pierre, SCAILLET, Olivier. Technical trading revisited: False discoveries, persistence tests, and transaction costs. In: Journal of financial economics, 2012, vol. 106, n° 3, p. 473-491. doi: 10.1016/j.jfineco.2012.06.001 https://archive-ouverte.unige.ch/unige:79889