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An alternative methodological approach to

assess the predictive performance of the moving

average trading rule in financial markets: Application to the London Stock Exchange.

 

Alexandros E. Milionis

Bank of Greece and University of the Aegean

 

Evangelia Papanagiotou

University of the Aegean

 

Abstract

In this work a modification of the Box-Tiao methodology for the assessment of the impact of external events on time series is proposed as an alternative statistical approach of assessing the predictive performance of the moving average trading rule in financial markets. With the proposed methodology measures of the predictive performance of the moving average trading rule can be simultaneously estimated, while at the same time controlling for autocorrelation in the series of asset returns. The potential advantages of the proposed methodology over the existing ones are discussed. Application of this alternative methodology to the returns of the FT30 Index of the London Stock Exchange shows good agreement with the empirical findings of other methods.

 

Keywords: Market Efficiency, Trading Rules, Moving Averages, Impact Assessment, Box-Tiao Models, London Stock Exchange.

JEL classification: G14, G17, C32

 

 Acknowledgements: The authors are grateful to H. Gibson for helpful comments. The views expressed in the paper are those of the authors and do not necessarily reflect those of the Bank of Greece.

 

Correspondence:

Alexandros E. Milionis

University of the Aegean,

Department of Statistics and Actuarial-Financial Mathematics

Karlovassi 83200, Samos, Greece

Tel.: +30-22730-82350,

Fax: +30-22730-82309

e-mail: amilionis@aegean.gr



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