moving average rules can generate profit in forein exchange trading. a study indicate an average 6 per cent return is achieved in the sample. it is known that ability to forecast the sign of movement is correlated to profitability. it was used to study moving average rule. it was found that only 55 per cent of the moving average rule is correct. moving average profitability was decomposed and linear structure can explain 30 to 80 per cent of the moving average rule profitability. research show that extended markov model perform better, 10 per cent more. markov switching model could produce better profitability than moving average rule. buy and sell signal is formulated in the markov model. the model also produce better sign prediction. but the performance is marginal. extended markov switching model can explain the profitability of the moving average rule. but the forecastability of the model is only 2 percent but it can explain about 10 per cent of the foreign exchange variability. studies say markov model can predict because it misspeciffied the states of the model. the markov model here has four states. I thought markov model has interesting capability for modeling finance phenomena and hope you would agree. there is a sample research which show that markov model could produce superior sharpe ratio performace. it is too complicated to describe on facebook. try the google it.
Posted on: Sun, 20 Oct 2013 12:18:12 +0000
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