A Mathematical Analysis of Technical Analysis

A Mathematical Analysis of Technical Analysis. Applied Mathematical Finance, 26(1), 38-68, 2019

29 Pages Posted: 30 Jun 2019

See all articles by Matthew Lorig

Matthew Lorig

University of Washington - Applied Mathematics

Zhou Zhou

The University of Sydney - School of Mathematics

Bin Zou

University of Connecticut - Department of Mathematics

Date Written: February 22, 2019

Abstract

In this paper, we investigate trading strategies based on exponential moving averages (ExpMAs) of an underlying risky asset. We study both logarithmic utility maximization and long-term growth rate maximization problems and find closed-form solutions when the drift of the underlying is modeled by either an Ornstein-Uhlenbeck process or a two-state continuous-time Markov chain. For the case of an Ornstein-Uhlenbeck drift, we carry out several Monte Carlo experiments in order to investigate how the performance of optimal ExpMA strategies is affected by variations in model parameters and by transaction costs.

Keywords: Long-term growth; Continuous-time Markov chain; Moving average; Optimal investment; Ornstein-Uhlenbeck process; Partial information; Simulation; Utility maximization

Suggested Citation

Lorig, Matthew and Zhou, Zhou and Zou, Bin, A Mathematical Analysis of Technical Analysis (February 22, 2019). A Mathematical Analysis of Technical Analysis. Applied Mathematical Finance, 26(1), 38-68, 2019, Available at SSRN: https://ssrn.com/abstract=3410687

Matthew Lorig

University of Washington - Applied Mathematics ( email )

Seattle, WA
United States

Zhou Zhou

The University of Sydney - School of Mathematics

Sydney, 2006
Australia

Bin Zou (Contact Author)

University of Connecticut - Department of Mathematics ( email )

341 Mansfield Road U1009
Department of Mathematics
Storrs, CT 06269-1069
United States

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