A real-time trading rule

Dooruj Rambaccussing

MPRA Paper from University Library of Munich, Germany

Abstract: If prices of assets are not aligned to their net present value, a trading strategy may be implemented when actual prices revert to fundamentals. A real-time trading strategy is introduced based on the assumption that reversion occurs in later periods. The fundamental price is constructed in real time using the net present value approach which requires the series for expected dividends, expected returns and expected dividend growth rate. These series, typically unobservable, are derived from a structural state space model. A battery of tests comparing the rule to the passive Buy and Hold Strategy illustrates that the rule is marginally better for shorter horizons.

Keywords: Trading Rule; Net Present Value; State Space Modeling (search for similar items in EconPapers)
JEL-codes: G12 G14 (search for similar items in EconPapers)
Date: 2010-06-06
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