3.6  Empirical results

3.6.1  Results for the mean return criterion

Technical trading rule performance

In section 3.2 we have shown that in the subperiod 1973-1986 most stocks could not even beat a risk free investment, while they boosted in the subperiod 1987-2001. However the larger rewards came with greater risks. One may question whether technical trading strategies can persistently generate higher pay-offs than the buy-and-hold benchmark. In total we apply 787 objective computerized trend-following technical trading techniques with and without transaction costs to the DJIA and to the stocks listed in the DJIA. Tables 3.5 and 3.6 show for the full sample period, 1973:1-2001:6, for each data series some statistics of the best strategy selected by the mean return criterion, if 0% and 0.25% costs per trade are implemented. Column 2 shows the parameters of the best strategy. In the case of a moving-average (MA) strategy these parameters are ``[short run MA, long run MA]'' plus the refinement parameters ``[%-band filter, time delay filter, fixed holding period, stop-loss]''. In the case of a trading range break, also called support-and-resistance (SR), strategy, the parameters are ``[the number of days over which the local maximum and minimum is computed]'' plus the refinement parameters as with the moving averages. In the case of a filter (FR) strategy the parameters are ``[the %-filter, time delay filter, fixed holding period]''. Columns 3 and 4 show the mean yearly return and excess mean yearly return of the best-selected strategy over the buy-and-hold benchmark, while columns 5 and 6 show the Sharpe ratio and excess Sharpe ratio of the best strategy over the buy-and-hold benchmark. Column 7 shows the maximum loss the best strategy generates. Columns 8, 9 and 10 show the number of trades, the percentage of profitable trades and the percentage of days profitable trades last. Finally, the last column shows the standard deviation of the returns of the data series during profitable trades divided by the standard deviation of the returns of the data series during non-profitable trades.

To summarize, table 3.7 shows for the full sample period, 1973:1-2001:6, and for the two subperiods, 1973:1-1986:12 and 1987:1-2001:6, for each data series examined, the mean yearly excess return over the buy-and-hold benchmark of the best strategy selected by the mean return criterion, after implementing 0, 0.10, 0.25 and 0.75%5 costs per trade.

For transaction costs between 0-1% it is found for each data series that the excess return of the best strategy over the buy-and-hold is positive in almost all cases; the only exception is Caterpillar in the full sample period if 1% costs per trade are implemented.

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