The predictability of asset returns: an approach combining technical analysis and time series forecasts

The predictability of asset returns: an approach combining technical analysis and time series forecasts

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Article ID: iaor20043647
Country: Netherlands
Volume: 19
Issue: 3
Start Page Number: 369
End Page Number: 385
Publication Date: Jul 2003
Journal: International Journal of Forecasting
Authors: ,
Keywords: time series & forecasting methods
Abstract:

We investigate predictability of asset returns by developing an approach that combines technical analysis and conventional time series forecasts. While exploiting components as functions of past prices or returns, technical trading rules and time series forecasts capture different aspects of market predictability: the former tends to identify periods to be in the market when returns are positive and the latter is capable of identifying periods to be out when returns are negative. Applied to daily Dow Jones Averages over the first 100 years, the combined strategies outperform both technical trading rules and time series forecasts. The predictability can be explained largely by non-trivial low-order correlations in returns and is not mainly attributable to measurement errors arising from non-synchronous trading.

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