Non-linear trading rules in the New York Stock Exchange

Julian Andrada-Felix (), Fernando Fernández Rodríguez () and María Dolores García Artiles ()
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Fernando Fernández Rodríguez: Universidad de Las Palmas de Gran Canaria; Facultad de Ciencias Económicas y Empresariales; Departamento de Métodos Cuantitativos en Economía y Gestión; c/Saulo Torón 4, 35017 Las Palmas de G.C. España; Tfno (0034) 928451802
María Dolores García Artiles: Universidad de Las Palmas de Gran Canaria; Facultad de Ciencias Económicas y Empresariales; Departamento de Métodos Cuantitativos en Economía y Gestión; c/Saulo Torón 4, 35017 Las Palmas de G.C. España; Tfno (0034) 928451807

Documentos de trabajo conjunto ULL-ULPGC from Facultad de Ciencias Económicas de la ULPGC

Abstract: In this paper we investigate the profitability of non-linear trading rules based on nearest neighbour (NN)predictors. Applying this investment strategy to the New York Stock Exchange, our results suggest that, taking into account transaction costs, the NN-based trading rule is superior to both a risk-adjusted buy-and-hold strategy and a linear ARIMA-based strategy in terms of returns for all of the years studied (1997-2002). Regarding other profitability measures, the NN-based trading rule yields higher Sharpe ratios than the ARIMA-based strategy for all of the years in the sample except for 2001. As for 2001, in 36 out of the 101 cases considered, the ARIMA-based strategy gives higher Sharpe ratios than those from the NN-trading rule, in 18 cases the opposite is true, and in the remaining 36 cases both strategies yield the same ratios.

Keywords: Technical trading rules; Nearest neighbour predictors; Security markets (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-fin and nep-fmk
Date: 2004-05
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