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A Mathematical Analysis of Technical Analysis |
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| Authors: | Matthew Lorig Zhou Zhou Bin Zou |
| Institution: | 1. Department of Applied Mathematics, University of Washington, Seattle, WA, USA;2. School of Mathematics and Statistics, University of Sydney, Sydney, Australia;3. Department of Mathematics, University of Connecticut, Storrs, CT, USA |
| Abstract: | In this paper, we investigate trading strategies based on exponential moving averages (ExpMAs) of an underlying risky asset. We study both logarithmic utility maximization and long-term growth rate maximization problems and find closed-form solutions when the drift of the underlying is modelled by either an Ornstein-Uhlenbeck process or a two-state continuous-time Markov chain. For the case of an Ornstein-Uhlenbeck drift, we carry out several Monte Carlo experiments in order to investigate how the performance of optimal ExpMA strategies is affected by variations in model parameters and by transaction costs. |
| Keywords: | Long-term growth continuous-time markov chain moving average optimal investment ornstein-uhlenbeck process partial information simulation utility maximization |