Volume 19 Issue 3 (July-September 2003)

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The predictability of asset returns: an approach combining technical analysis and time series forecasts

Fang, Y. , Xu, D.
Pages 369-385

We investigate predictability of asset returns by developing an approach that combines technical analysis and conventional time series forecasts. While exploiting predictable components as functions of past prices or returns, technical trading rules and time series forecasts capture different aspects of market predictability: the former tends to identify periods to be in the market when returns are positive and the latter is capable of identifying periods to be out when returns are negative. Applied to daily Dow Jones Averages over the first 100 years, the combined strategies outperform both technical trading rules and time series forecasts. The predictability can be explained largely by non-trivial low-order serial correlations in returns and is not mainly attributable to measurement errors arising from non-synchronous trading.

Keywords: AR-GARCH models , Combining forecasts , Excess returns , Predictability , Technical trading rules
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