Market Timing with Moving Averages
Consider using the simple moving average (MA) rule of Gartley (1935) to determine when to buy stocks, and when to sell them and switch to the risk-free rate. In comparison, how might the performance be affected if the frequency is changed to the use of MA calculations?
The empirical results show that, on average, the lower is the frequency, the higher are average daily returns, even though the volatility is virtually unchanged when the frequency is lower.
The volatility from the highest to the lowest frequency is about 30% lower as compared with the buy-and-hold strategy volatility, but the average returns approach the buy-and-hold returns when frequency is lower. The 30% reduction in volatility appears if we invest randomly half the time in stock markets and half in the riskfree rate.
|Keywords||Market timing, Moving averages, Risk-free rate, Returns and volatility|
|JEL||Financing Policy; Capital and Ownership Structure (jel G32), Financial Econometrics (jel C58), Time-Series Models; Dynamic Quantile Regressions (jel C22), Duration Analysis (jel C41), Organizational Behavior; Transaction Costs; Property Rights (jel D23)|
|Series||Econometric Institute Research Papers|
Ilomäki, J, Laurila, H, & McAleer, M.J. (2018). Market Timing with Moving Averages (No. EI 2018-28). Econometric Institute Research Papers. Retrieved from http://hdl.handle.net/1765/110015