Spurious regressions in technical trading |
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Authors: | Mototsugu Shintani Tomoyoshi Yabu Daisuke Nagakura |
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Institution: | 1. Department of Economics, Vanderbilt University, USA;2. Faculty of Business and Commerce, Keio University, Japan;3. Faculty of Economics, Keio University, Japan |
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Abstract: | 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 no 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 theoretical analysis reveals 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. |
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Keywords: | C12 C22 C25 G11 G15 |
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