Spurious regressions in technical trading: momentum or contrarian?

東京大学経済学研究科棟 3階 第4教室

新谷元嗣 氏
Vanderbilt University

This paper investigates a spurious effect in forecasting asset returns when signals from technical trading rules are used as predictors. The simulation result shows that, even if the past information has no predictive power, buy or sell signals constructed from the difference between the short and long moving average of past values can be statistically significant when forecast horizon is relatively long. The theory implies that both momentum and contrarian are possible, while the probability of each case depends on the type of the test statistics employed. Several possibilities of preventing the spurious regression are also discussed. The proposed method is applied to the stock market index and foreign exchange rates to reconsider the predictive power of technical trading rules.