Making money in a downturn economy: Using the overshooting mechanism of stock prices for an investment strategy

Marco Folpmers ()
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Marco Folpmers: Capgemini

Journal of Asset Management, 2009, vol. 10, issue 1, No 1, 8 pages

Abstract: Abstract In this paper we show that a straightforward model to identify local extremes in a financial index can be applied to a subsequent period as a trading algorithm. The theoretical justification of the algorithm is the short-term behaviour of the index as an oscillation with predictable frequency. The economic interpretation of this behaviour relates to the overshooting and mean reversion properties of the financial time series. The algorithm is applied to the two main Euronext indices, sc. the AEX index and the CAC40 index. The algorithm outperforms the buy and hold investment strategy considerably in both cases.

Keywords: asset management; algorithmic trading; financial time series modelling (search for similar items in EconPapers)
Date: 2009
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DOI: 10.1057/jam.2008.41

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