Asymmetric return dynamics and technical trading strategies |
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| Institution: | 1. Department of Economics and Finance, University of Texas – Pan American, Edinburg, TX 78539, USA;2. Department of Economics and Finance, Texas A&M University – Commerce, Commerce, TX 75429, USA;3. Department of Finance, Insurance and Real Estate, University of Memphis, Memphis, TN 38152, USA;1. Karlsruhe Institute of Technology, Institute for Nuclear Waste Disposal, P.O. Box 3640, D-76021 Karlsruhe, Germany;2. Friedrich-Schiller-University Jena, Institute of Geosciences, Applied Geology, Burgweg 11, D-07749 Jena, Germany |
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| Abstract: | We investigate the profitability of technical trading strategies based on an asymmetric reverting property of stock returns. We identify an asymmetry in return dynamics for daily returns on the S&P 500 index. Return dynamics evolve along a positive (negative) unconditional mean after a prior positive (negative) return. The trading strategies based on this asymmetry generate a positive return for buy signals, a negative return for sell signals, and a positive return for the spread between buy and sell signals. Our results imply that the observed asymmetry in return dynamics is the main source of profitability for the implied strategies, thereby corroborating arguments for the usefulness of technical trading strategies. |
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