Can Risk Premium Explain Technical Trading Profits? A Study of the UK Markets
Kadida R. Mashaushi* (Senior Lecturer, The Institute of Finance Management, Dar es Salaam, Tanzania)
Download Article | Published On 01/02/2007

Abstract

Over the past two decades studies of the efficacy of trading rules have increasingly found returns to be predictable and presence of statistically significant abnormal returns out-of sample. Despite the fact that technical trading can have relatively less volatile returns due to being in and out of the market, some previous studies have explained their abnormal retums as compensation for risk premium. These studies have shown that periods of higher returns are associated with periods of greater volatility and that any profits remaining after adjusting for risk are statistically insignificant. In this article we use rolling windows for estimating and calculating relevant risk for evaluating technical trading profits. While noting the difficulty of modelling risk, this article concludes that there is no sufficient evidence to support the idea that markets are not efficient on a risk adjusted basis.

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