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

Funding

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.

Keywords

Loss avoidance
Tail risk
Technical trading rules

Access to Document

10.1016/j.pacfin.2023.102172

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Cite this

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title = "Technical trading rules, loss avoidance, and the business cycle",

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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ER -

Technical trading rules, loss avoidance, and the business cycle

Abstract

Bibliographical note

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Keywords

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