59 Pages Posted: 23 Oct 2015 Last revised: 11 Dec 2015
Date Written: December 11, 2015
Despite the enormous current interest in market timing and a series of publications in academic journals, there is still lack of comprehensive research on the evaluation of the profitability of trading rules using methods that are free from the data-snooping bias. In this paper we utilize the longest historical dataset that spans 155 years and extend previous studies on the performance of moving average trading rules in a number of important ways. Among other things, we investigate whether overweighting the recent prices improves the performance of timing rules; whether there is a single optimal lookback period in each trading rule; and how accurately the trading rules identify the bullish and bearish stock market trends. In our study we, for the first time, use both the rolling- and expanding-window estimation scheme in the out-of-sample tests; study the performance of trading rules across bull and bear markets; and perform numerous robustness checks and tests for regime shifts in the stock market dynamics. Our main results can be summarized as follows: There is strong evidence that the stock market dynamics are changing over time. We find no statistically significant evidence that market timing strategies outperformed the market in the second half of our sample. Neither the shape of the weighting function nor the type of the out-of-sample estimation scheme allows a trader to improve the performance of timing rules. All market timing rules generate many false signals during both bullish and bearish stock market trends, yet these rules tend to outperform the market in bear states.
Keywords: technical analysis, market timing, moving averages, regime switching, bull and bear markets, out-of-sample testing
JEL Classification: G11, G17
Suggested Citation: Suggested Citation
Zakamulin, Valeriy, A Comprehensive Look at the Empirical Performance of Moving Average Trading Strategies (December 11, 2015). Available at SSRN: https://ssrn.com/abstract=2677212 or http://dx.doi.org/10.2139/ssrn.2677212