Brock and LeBaron are from the University of Wisconsin and Lakonishok is from the University of Illinois. We are grateful to Tim Bollerslev, K. C. Chan, Louis Chan, Eugene Fama, Bruce Lehmann, Mark Ready, Jay Ritter, William Schwert, Theo Vermaelen, and the editor, René Stulz, and anonymous referees. The paper was presented at the AFA Meetings at New Orleans, The Amsterdam Institute of Finance, the NBER Summer Institute, the University of Limburg, and The Wharton School. We are thankful to Hank Pruden, a leading technical analyst, for guidance on some of the technical analysis literature. Brock was partially supported by the National Science Foundation (SES 87–20671), the Vilas Trust, and the University of Wisconsin Graduate School. LeBaron was partially supported by the National Science Foundation (SES 91–09671), and the University of Wisconsin Graduate School.
Simple Technical Trading Rules and the Stochastic Properties of Stock Returns
Article first published online: 30 APR 2012
1992 The American Finance Association
The Journal of Finance
Volume 47, Issue 5, pages 1731–1764, December 1992
How to Cite
BROCK, W., LAKONISHOK, J. and LeBARON, B. (1992), Simple Technical Trading Rules and the Stochastic Properties of Stock Returns. The Journal of Finance, 47: 1731–1764. doi: 10.1111/j.1540-6261.1992.tb04681.x
- Issue published online: 30 APR 2012
- Article first published online: 30 APR 2012
This paper tests two of the simplest and most popular trading rules—moving average and trading range break—by utilizing the Dow Jones Index from 1897 to 1986. Standard statistical analysis is extended through the use of bootstrap techniques. Overall, our results provide strong support for the technical strategies. The returns obtained from these strategies are not consistent with four popular null models: the random walk, the AR(1), the GARCH-M, and the Exponential GARCH. Buy signals consistently generate higher returns than sell signals, and further, the returns following buy signals are less volatile than returns following sell signals, and further, the returns following buy signals are less volatile than returns following sell signals. Moreover, returns following sell signals are negative, which is not easily explained by any of the currently existing equilibrium models.