Trading profitability from learning and adaptation on the Tokyo Stock Exchange

    Research output: Contribution to journalArticle

    2 Citations (Scopus)

    Abstract

    This study proposes unexamined technical trading rules, which are dynamically switching strategies among filter, moving average and trading-range breakout rules. The dynamically switching strategy is formulated based on a discrete choice theory consistent with the concept of myopic utility maximization. We utilize the transaction data of the individual stocks listed on the Nikkei 225 from September 1, 2005 to August 31, 2007. We demonstrate that switching strategies produce positive returns and their performance is better than those from the buy-and-hold and non-switching strategies over our sample periods. We also demonstrate equivalent performance for switching with different learning horizons, implying that behavioural heterogeneity of stock investors arises from the coexistence of different strategies with varying degrees of learning horizons. Our result supports several research assumptions and results on agent-based theoretical models that successfully replicate empirical features in financial markets, such as fat tails of return distributions and volatility clustering. However, upon considering the effects of data-snooping bias superior performance disappears.

    Original languageEnglish
    JournalQuantitative Finance
    DOIs
    Publication statusAccepted/In press - 2015 Nov 10

    Fingerprint

    Profitability
    Tokyo Stock Exchange
    Agent-based
    Return distribution
    Volatility clustering
    Data snooping
    Filter
    Transaction data
    Financial markets
    Behavioral heterogeneity
    Technical trading rules
    Coexistence
    Fat tails
    Choice theory
    Utility maximization
    Moving average
    Investors
    Discrete choice
    Return volatility

    Keywords

    • Adaptation
    • Agent-based model
    • Learning
    • Technical analysis
    • Tokyo Stock Exchange

    ASJC Scopus subject areas

    • Economics, Econometrics and Finance(all)
    • Finance

    Cite this

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    abstract = "This study proposes unexamined technical trading rules, which are dynamically switching strategies among filter, moving average and trading-range breakout rules. The dynamically switching strategy is formulated based on a discrete choice theory consistent with the concept of myopic utility maximization. We utilize the transaction data of the individual stocks listed on the Nikkei 225 from September 1, 2005 to August 31, 2007. We demonstrate that switching strategies produce positive returns and their performance is better than those from the buy-and-hold and non-switching strategies over our sample periods. We also demonstrate equivalent performance for switching with different learning horizons, implying that behavioural heterogeneity of stock investors arises from the coexistence of different strategies with varying degrees of learning horizons. Our result supports several research assumptions and results on agent-based theoretical models that successfully replicate empirical features in financial markets, such as fat tails of return distributions and volatility clustering. However, upon considering the effects of data-snooping bias superior performance disappears.",
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