Chapter 5 Technical Trading Rule Performance
in Local Main Stock Market Indices
5.1 Introduction
Brock, Lakonishok and LeBaron (1992) found that technical trading rules show forecasting power when applied to the Dow-Jones Industrial Average (DJIA) in the period 1896-1986. Sullivan, Timmermann and White (1999) confirmed their results for the same period, after they made a correction for data snooping. However they noticed that the forecasting power seems to disappear in the period after 1986. Next, Bessembinder and Chan (1998) found that break even transaction costs, that is costs for which trading rule profits disappear, are lower than real transaction costs in the period 1926-1991 and that therefore the technical trading rules examined by Brock et al. (1992) are not economically significant when applied to the DJIA. The trading rule set of Brock et al. (1992) has been applied to many other local main stock market indices. For example, to Asian stock markets by Bessembinder and Chan (1995), to the UK stock market by Hudson, Dempsey and Keasey (1996) and Mills (1997), to the Spanish stock market by Fernández-Rodríguez, Sosvilla-Rivero, and Andrada-Félix (2001), to Latin-American stock markets by Ratner and Leal (1999) and to the Hong Kong stock market by Coutts and Cheung (2000).In this chapter we test whether objective computerized trend-following technical trading techniques can profitably be exploited after correction for risk and transaction costs when applied to the local main stock market indices of 50 countries and the MSCI World Index. Firstly, we do as if we are a local trader and we apply the technical trading rules to the indices in local currency and we compute the profits in local currency. However these profits could be spurious if the local currencies weakened against other currencies. Therefore, secondly, we do as if we are an US-based trader and we calculate the profits
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