Technical Trading Revisited: False Discoveries, Persistence Tests, and Transaction Costs

61 Pages Posted: 19 Mar 2008 Last revised: 23 Feb 2018

See all articles by Pierre Bajgrowicz

Pierre Bajgrowicz

University of Geneva - Geneva Finance Research Institute (GFRI)

O. Scaillet

University of Geneva GSEM and GFRI; Swiss Finance Institute; University of Geneva - Research Center for Statistics

Date Written: December 2011

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 o set 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

JEL Classification: C12, C15, G11, G14

Suggested Citation

Bajgrowicz, Pierre and Scaillet, Olivier, Technical Trading Revisited: False Discoveries, Persistence Tests, and Transaction Costs (December 2011). EFA 2008 Athens Meetings Paper; Swiss Finance Institute Research Paper No. 08-05. Available at SSRN: https://ssrn.com/abstract=1095202 or http://dx.doi.org/10.2139/ssrn.1095202

Pierre Bajgrowicz (Contact Author)

University of Geneva - Geneva Finance Research Institute (GFRI) ( email )

40 Bd du Pont d'Arve
Geneva 4, 1211
Switzerland

Olivier Scaillet

University of Geneva GSEM and GFRI ( email )

40 Boulevard du Pont d'Arve
Geneva 4, 1211
Switzerland
+ 41 22 379 88 16 (Phone)
+41 22 389 81 04 (Fax)

HOME PAGE: http://www.scaillet.ch

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

University of Geneva - Research Center for Statistics

Geneva
Switzerland

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