Technical trading rules, loss avoidance, and the business cycle

Lerby Ergun; Alexander Molchanov; Philip Stork

doi:10.1016/j.pacfin.2023.102172

Technical trading rules, loss avoidance, and the business cycle

Lerby Ergun, Alexander Molchanov^*, Philip Stork

^*Corresponding author for this work

Research output: Contribution to Journal › Article › Academic › peer-review

Abstract

We show that simple technical trading rule (TTR) strategies substantially reduce investment left tail risk. An investor following a TTR strategy can also avoid a high percentage of extremely negative returns. This percentage increases substantially during recessions. Interestingly, tail risk reduction does not come at a cost of lower performance – risk adjusted returns of TTR strategies are in fact higher than those of a buy-and-hold strategy. Our findings are robust to changes in trading strategy specifications. They hold in 38 international equity markets, as well as in a large sample of individual US stocks, and survive a reality check bootstrap.

Original language	English
Article number	102172
Pages (from-to)	1-19
Number of pages	19
Journal	Pacific Basin Finance Journal
Volume	82
Issue number	December
DOIs	https://doi.org/10.1016/j.pacfin.2023.102172
Publication status	Published - Dec 2023

Bibliographical note

Funding Information:
We thank participants of the New Zealand Finance Colloquium, an Auckland University of Technology seminar, the Australasian Finance and Banking Conference in Sydney, and the INFINITI Conference on International Finance ASIA-PACIFIC in Sydney. We also thank the anonymous referee for valuable comments and suggestions.

Publisher Copyright:
© 2023

Keywords

Loss avoidance
Tail risk
Technical trading rules

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10.1016/j.pacfin.2023.102172

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abstract = "We show that simple technical trading rule (TTR) strategies substantially reduce investment left tail risk. An investor following a TTR strategy can also avoid a high percentage of extremely negative returns. This percentage increases substantially during recessions. Interestingly, tail risk reduction does not come at a cost of lower performance – risk adjusted returns of TTR strategies are in fact higher than those of a buy-and-hold strategy. Our findings are robust to changes in trading strategy specifications. They hold in 38 international equity markets, as well as in a large sample of individual US stocks, and survive a reality check bootstrap.",

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N2 - We show that simple technical trading rule (TTR) strategies substantially reduce investment left tail risk. An investor following a TTR strategy can also avoid a high percentage of extremely negative returns. This percentage increases substantially during recessions. Interestingly, tail risk reduction does not come at a cost of lower performance – risk adjusted returns of TTR strategies are in fact higher than those of a buy-and-hold strategy. Our findings are robust to changes in trading strategy specifications. They hold in 38 international equity markets, as well as in a large sample of individual US stocks, and survive a reality check bootstrap.

AB - We show that simple technical trading rule (TTR) strategies substantially reduce investment left tail risk. An investor following a TTR strategy can also avoid a high percentage of extremely negative returns. This percentage increases substantially during recessions. Interestingly, tail risk reduction does not come at a cost of lower performance – risk adjusted returns of TTR strategies are in fact higher than those of a buy-and-hold strategy. Our findings are robust to changes in trading strategy specifications. They hold in 38 international equity markets, as well as in a large sample of individual US stocks, and survive a reality check bootstrap.

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Technical trading rules, loss avoidance, and the business cycle

Abstract

Bibliographical note

Keywords

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