Forecast Performance of Moving Average Rules with Stock Returns

摘要

Among analysts, technical trading rules are widely used for forecasting security returns. Recent literature provides evidence that these rules may provide positive profits after accounting for transcction costs. This paper uses the daily Dow Jones Industrial Average Index to examine the linear and nonlinear predicability of stock market returns with simple technical trading rules. Strong evidence of nonlinear predictability is found in the stock market returns by using the past buy and sell signals of the moving average rules. Furthermore, nonlinear specification with buy and sell signals explains a substantially higher proportion of the variations in expected returns.