Technical Analysis Compared to Mathematical Models Based Methods Under Parameters Mis-specification

Christophette Blanchet-Scalliet 1 Awa Diop 2, 3 Rajna Gibson Brandon 4 Denis Talay 3 Etienne Tanré 3
3 TOSCA
INRIA Lorraine, CRISAM - Inria Sophia Antipolis - Méditerranée , UHP - Université Henri Poincaré - Nancy 1, Université Nancy 2, INPL - Institut National Polytechnique de Lorraine, CNRS - Centre National de la Recherche Scientifique : UMR7502
Abstract : In this study, we compare the performance of trading strategies based on possibly mis-specified mathematical models with a trading strategy based on a technical trading rule. In both cases, the trader attempts to predict a change in the drift of the stock return occurring at an unknown time.Weexplicitly compute the trader's expected logarithmic utility of wealth for the various trading strategies. We next rely on Monte Carlo numerical experiments to compare their performance. The simulations show that under parameter mis-specification, the technical analysis technique out-performs the optimal allocation strategy but not the Model and Detect strategies. The latter strategies dominance is confirmed under parameter mis-specification as long as the two stock returns' drifts are high in absolute terms.
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Submitted on : Thursday, May 19, 2011 - 2:34:34 PM
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Christophette Blanchet-Scalliet, Awa Diop, Rajna Gibson Brandon, Denis Talay, Etienne Tanré. Technical Analysis Compared to Mathematical Models Based Methods Under Parameters Mis-specification. Journal of Banking and Finance, Elsevier, 2007, 31 (5), pp.1351-1373. ⟨10.1016/j.jbankfin.2006.10.017⟩. ⟨hal-00594295⟩

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