An Empirical Evaluation of Non-Linear Trading Rules
FEDEA Working Paper No. 2001-16
21 Pages Posted: 12 Oct 2001
Date Written: September 2001
In this paper we investigate the profitability of non-linear trading rules based on nearest neighbor predictors. Applying this investment strategy to the New York Stock Exchange, our results suggest that, taking into account transaction costs, the non-linear trading rule is superior to a risk-adjusted buy-and-hold strategy (both in terms of returns and of Sharpe ratios) for the 1998 and 1999 periods of upward trend. In contrast, for the relatively "stable" market period of 2000, we found that both strategies generate equal returns, although the risk-adjusted buy-and-hold strategy yields a higher Sharpe ratio.
Keywords: Technical trading rules, Nearest neighbor predictors, Security markets
JEL Classification: G10, G14, C53
Suggested Citation: Suggested Citation