Alternative trading strategies to beat “buy-and-hold”

Eddie C.M. Hui, Ka Kwan Kevin Chan

Research output: Journal article publicationJournal articleAcademic researchpeer-review

2 Citations (Scopus)

Abstract

In the past, many investors believed in the “buy-and-hold” strategy based on the efficient market hypothesis (EMH). However, since the global financial crisis in 2008, there has been more and more criticism on the EMH. As a result, many people attempted to find a trading strategy to outperform “buy-and-hold”. In particular, Hui and Chan (2017) construct a generalized time-dependent strategy and test it on 12 stock indices, but they show mixed results. In light of this, this study constructs two new trading strategies. Instead of buying or selling the stock index immediately when the estimator of Shiryaev–Zhou index μˆin changes sign as in Hui and Chan (2017)’s strategy, we wait until μˆin remains at the same sign for two or three consecutive days before buying or selling the stock index for our new strategies. This reduces the number of times of trading the stock index for our strategies. We apply our strategies on six securitized real estate indices and six general equity indices. The results show that our newly constructed Strategy 3 (after μˆin changes sign, we wait until μˆin remains at the same sign for three consecutive days before changing our buying/selling position) outperforms the other two strategies in overall, especially when transaction costs exist. This study can act as a reference for investors to formulate better trading strategies to earn more profit in this globalized modern financial market with increasing market fluctuations.

Original languageEnglish
Article number120800
JournalPhysica A: Statistical Mechanics and its Applications
Volume534
DOIs
Publication statusPublished - 15 Nov 2019

Keywords

  • Moving-window size
  • Shiryaev–Zhou index
  • Trading strategy
  • Transaction cost
  • “Smoothing effect”

ASJC Scopus subject areas

  • Statistics and Probability
  • Condensed Matter Physics

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