Home

Beating the market? A mathematical puzzle for market efficiency

Download Link
https://econpapers.repec.org/scripts/redir.pf?u=http%3A%2F%2Flink.springer.com%2F10.1007%2Fs10203-021-00361-8;h=repec:spr:decfin:v:45:y:2022:i:1:d:10.1007_s10203-021-00361-8
Time Added
6/20/2022, 12:20:36 PM
Search
Trading Strategies
Total Downloads
0
Authors
Michael Heinrich Baumann Michael Heinrich Baumann: University of Bayreuth
Abstract
Abstract The efficient market hypothesis is highly discussed in economic literature. In its strongest form it states that there are no price trends. When weakening the non-trending assumption to arbitrary short small and fully unknown trends we mathematically prove for a specific class of control-based trading strategies positive expected gains. These strategies are model free i.e. a trader neither has to think about predictable patterns nor has to estimate market parameters such as the trend’s sign like momentum traders have to do. That means since the trader does not have to know any trend even trends too small to find are enough to beat the market. Adjustments for risk and comparisons with buy-and-hold strategies do not satisfactorily solve the problem. In detail we generalize results from the literature on control-based trading strategies to market settings without specific model assumptions but with time-varying parameters in discrete and continuous time. We give closed-form formulae for the expected gain as well as the gain’s variance and generalize control-based trading rules to a setting where older information counts less. In addition we perform an exemplary backtesting study taking transaction costs and bid-ask spreads into account and still observe—on average—positive gains.
Keywords
Technical analysis ; Efficient market hypothesis ; Robust positive expectation property ; Simultaneously long short trading ; Control-based trading strategies ; 91G10 ; 91G99 ; 91B70 (search for similar items in EconPapers)
Year Published
2022
Series
Decisions in Economics and Finance 2022 vol. 45 issue 1 No 11 279-325
Rank
0.73
TOP