An Empirical Evaluation of Non-Linear Trading Rules

FEDEA Working Paper No. 2001-16

21 Pages Posted: 12 Oct 2001

See all articles by Julián Andrada Félix

Julián Andrada Félix

University of Las Palmas de Gran Canaria - Faculty of Economic Science

Fernando Fernández Rodríguez

University of Las Palmas de Gran Canaria - Faculty of Economic Science

María Dolores García Artiles

University of Las Palmas de Gran Canaria - Faculty of Economic Science

Simon Sosvilla-Rivero

UCM Institute for Economic Analysis

Date Written: September 2001

Abstract

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

Andrada Félix, Julián and Fernández Rodríguez, Fernando and García Artiles, María Dolores and Sosvilla-Rivero, Simon, An Empirical Evaluation of Non-Linear Trading Rules (September 2001). FEDEA Working Paper No. 2001-16. Available at SSRN: https://ssrn.com/abstract=286471 or http://dx.doi.org/10.2139/ssrn.286471

Julián Andrada Félix

University of Las Palmas de Gran Canaria - Faculty of Economic Science ( email )

E-35017 Las Palmas
Spain
+34 928 45 59 89 (Phone)
+34 928 45 18 29 (Fax)

Fernando Fernández Rodríguez

University of Las Palmas de Gran Canaria - Faculty of Economic Science ( email )

Campus de Tafira
E-35017 Las Palmas
Spain
+34 928 45 18 02 (Phone)
+34 928 45 18 29 (Fax)

María Dolores García Artiles

University of Las Palmas de Gran Canaria - Faculty of Economic Science ( email )

E-35017 Las Palmas
Spain
+34 928 45 18 17 (Phone)
+34 928 45 18 29 (Fax)

Simon Sosvilla-Rivero (Contact Author)

UCM Institute for Economic Analysis ( email )

Carretera de Humera s/n
Madrid, Madrid 28223
Spain
+34913932626 (Phone)

HOME PAGE: http://www.ucm.es/info/ecocuan/ssr/

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