Filter Rules: Follow the Trend, or Take the Contrarian Approach?

Abstract

This paper compares a trending approach to the filter trading rule against a contrarian approach. It is found that, after adjusting for transaction costs, the contrarian approach consistently outperforms the trending approach, and is able to earn returns in excess of the buy-and-hold trading strategy. The significance and robustness of the results are supported by a bootstrap simulation and sub-period analysis, respectively.

Keywords: Filter Rule, Market Efficiency, Contrarian Trading Strategy

JEL Classification: G14, G19, N22