Optimal Trend-Following With Transaction Costs

41 Pages Posted: 22 Nov 2022 Last revised: 18 Mar 2023

See all articles by Valeriy Zakamulin

Valeriy Zakamulin

University of Agder - School of Business and Law

Javier Giner

University of La Laguna - Faculty of Economics, Business and Tourism

Date Written: November 20, 2022

Abstract

Despite trend-following investing's widespread popularity, optimal trend-following with transaction costs remains poorly understood. Existing studies on the subject are limited and use a theoretical approach that is difficult to solve. In this paper, we propose a new, more practical model that strikes a balance between theoretical simplicity and practical relevance. Our model reduces trading costs and produces a solution that is comparable to the popular simple moving average crossover rule. By using our model, traders can justify using the crossover rule in practice. We also provide historical simulations that demonstrate the effectiveness of our model, supporting our theoretical findings. In short, our paper provides a practical and effective solution to the problem of optimal trend-following with transaction costs.

Keywords: stock market, trend-following, transaction costs, simple moving average, moving average crossover

JEL Classification: G11, G17

Suggested Citation

Zakamulin, Valeriy and Giner, Javier, Optimal Trend-Following With Transaction Costs (November 20, 2022). Available at SSRN: https://ssrn.com/abstract=4282126 or http://dx.doi.org/10.2139/ssrn.4282126

Valeriy Zakamulin (Contact Author)

University of Agder - School of Business and Law ( email )

Service Box 422
Kristiansand, N-4604
Norway
+47 38141039 (Phone)

HOME PAGE: http://vzakamulin.weebly.com/

Javier Giner

University of La Laguna - Faculty of Economics, Business and Tourism ( email )

Camino La Hornera s/n
La Laguna, Tenerife, 38071
Spain
+34 922317102 (Phone)

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