A tangent linear approach in technical trading strategy: the use of convexity path in stock market indices

We herein examine the performance of the expected convexity path of a market index using a novel measure of a tangent linear approach. The expected path is expressed as a linear combination that shows whether the transmission from the present value t to the future one (t + k)th is a convex or a concave curve, which depends on the model’s parameters. We then carry out an extensive empirical analysis for six stock market indices on in‐and‐out of the sample random time intervals for every index. Overall, the presented findings are important and show significant evidence of the predictive power of the approach that an investor can use to develop or redefine his or her short‐term investment strategy.