the period 1987-2001, on average, the mean yearly excess return over the buy-and-hold benchmark declines from 17% to 7%, if transaction costs are increased from 0% to 1% per trade (see section 3.6.1, page ??, and table 3.7, page ??). It is interesting to compare our results to Fama (1965) and Theil and Leenders (1965). It was found by Theil and Leenders (1965) that the proportions of securities advancing and declining today on the Amsterdam Stock Exchange can help in predicting the proportions of securities advancing and declining tomorrow. However, Fama (1965) in contrast found that this is not true for the New York Stock Exchange. In our study we find that this difference in forecastability of both stock markets tends to persists into the 1980s and 1990s.
From table 4.4 it can be seen that in the case of zero transaction costs the best-selected strategies are mainly strategies which generate a lot of signals. Trading positions are held for only a few days. With hindsight, the best strategy for the Fokker and UPC stocks was to never have bought them, earning a risk-free interest rate during the investment period. For the AEX-index, in contrast, the best strategy is a single crossover moving-average rule which generates a signal if the price series crosses a 25-day moving average and where the single refinement is a 10% stop-loss. The mean yearly return is equal to 25%, which corresponds with a mean yearly excess return of 13.2%. The Sharpe ratio is equal to 0.0454 and the excess Sharpe ratio is equal to 0.0307. These excess performance measures are considerably large. The maximum loss of the strategy is 43.9%, slightly less than the maximum loss of buying and holding the AEX-index, which is equal to 46.7% (table 4.2). Once every 12 days the strategy generates a trade and in 65.9% of the trades is profitable. These profitable trades span 85% of the total number of trading days. Although the technical trading rules show economic significance, they all go through periods of heavy losses, well above the 50% for most stocks.
If transaction costs are increased to 0.25%, then table 4.5 shows that the best-selected strategies are strategies which generate substantially fewer signals in comparison with the zero transaction costs case. Trading positions are now held for a longer time. For example, for the AEX-index the best-selected strategy generates a trade every one-and-a-half year. Also the percentage of profitable trades and the percentage of days profitable trades last increases for most data series. Most extremely this is the case for the AEX-index; the 13 trading signals of the best-selected strategy were all profitable.