Spurious Regressions in Technical Trading: Momentum or Contrarian?
Tomoyoshi Yabu and
No 08-E-09, IMES Discussion Paper Series from Institute for Monetary and Economic Studies, Bank of Japan
This paper investigates the spurious effect in forecasting asset returns when signals from technical trading rules are used as predictors. Against economic intuition, the simulation result shows that, even if past information has non predictive power, buy or sell signals based on the difference between the short-period and long-period moving averages of past asset prices can be statistically significant when the forecast horizon is relatively long. The theory implies that both ' momentum' and 'contrarian' strategies can be falsely supported, while the probability of obtaining each result depends on the type of the test statistics employed. Several modifications to these test statistics are considered for the purpose of avoiding spurious regressions. They are applied to the stock market index and the foreign exchange rate in order to reconsider the predictive power of technical trading rules.
Keywords: Efficient market hypothesis; Nonstationary time series; Random walk; Technical analysis (search for similar items in EconPapers)
JEL-codes: C12 C22 C25 G11 G15 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-for
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1) Track citations by RSS feed
Downloads: (external link)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:ime:imedps:08-e-09
Access Statistics for this paper
More papers in IMES Discussion Paper Series from Institute for Monetary and Economic Studies, Bank of Japan Contact information at EDIRC.
Bibliographic data for series maintained by Kinken ().