23 Pages Posted: 4 Mar 1998
Date Written: February 5, 1998
I examine technical trading rules developed by Allen and Karjalainen (1993) and moving average rules studied by Brock, Lakonishok, and LeBaron (1992). Using intraday data, I find that profits reported in these studies may not have been achievable due to price slippage between when trading signals are measured and when trades could actually be executed. I also find that the 0.1% one-way transaction cost assumed by Allen and Karjalainen appears too low. I find that the ability of all of the rules to distinguish between days of high and low returns has declined dramatically over the last six to eight years, suggesting that factors causing return predictability may change over time.
I test modified rules that account for higher transaction costs and potential price slippage and are based on more recent data. These new rules do considerably better, but they still are unable to beat a buy and hold strategy.
JEL Classification: G11, G12
Suggested Citation: Suggested Citation