Home

Optimal Trend-Following in a Markov Switching Model

Abstract Views
93
Author
Valeriy Zakamulin Javier Giner
Category
Financial
Date Posted
2022/05/02
Date Retrieved
2022/05/17
Date Revised
Empty
Date Written
2022/04/25
Description
This paper assumes that the market returns follow a two-state Markov process that randomly switches between bull and bear states. We show that in this case the exponential moving average (EMA) represents the optimal trend-following rule. The paper provides the analytical solution to the optimal window size (decay constant) in the EMA rule. We estimate the optimal window size for timing the S&P 500 stock market index using real-world data. A comparative statics analysis finds that the optimal window size depends mainly on the signal-to-noise ratio of returns and the state transition probabilities.
Downloads
43
Exports
0
JEL Classifications
G11 G17
Keywords
Markov switching model bull-bear markets optimal trend-following moving averages
News Mentions
0
Pages
12
Random
248
Readers
2
Shares and Likes
0
Tweets
0
URL
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4092437
TOP