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Non-linear trading rules in the New York Stock Exchange

Author

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  • Julián Andrada Félix

    (Universidad de Las Palmas de Gran Canaria; Facultad de Ciencias Económicas y Empresariales; Departamento de Métodos Cuantitativos en Economía y Gestión; c/Saulo Torón 4, 35017 Las Palmas de G.C. España; Tfno (0034) 928458959)

  • Fernando Fernández Rodríguez

    (Universidad de Las Palmas de Gran Canaria; Facultad de Ciencias Económicas y Empresariales; Departamento de Métodos Cuantitativos en Economía y Gestión; c/Saulo Torón 4, 35017 Las Palmas de G.C. España; Tfno (0034) 928451802)

  • María Dolores García Artiles

    (Universidad de Las Palmas de Gran Canaria; Facultad de Ciencias Económicas y Empresariales; Departamento de Métodos Cuantitativos en Economía y Gestión; c/Saulo Torón 4, 35017 Las Palmas de G.C. España; Tfno (0034) 928451807
    Universidad Complutense de Madrid; Facultad de Ciencias Económicas; Departamento Economía Cuantitativa Fundamentos del Análisis Económico II; Campus de Somosaguas; 28223 Madrid; España; Tfno (0034)913942384)

Abstract

In this paper we investigate the profitability of non-linear trading rules based on nearest neighbour (NN)predictors. Applying this investment strategy to the New York Stock Exchange, our results suggest that, taking into account transaction costs, the NN-based trading rule is superior to both a risk-adjusted buy-and-hold strategy and a linear ARIMA-based strategy in terms of returns for all of the years studied (1997-2002). Regarding other profitability measures, the NN-based trading rule yields higher Sharpe ratios than the ARIMA-based strategy for all of the years in the sample except for 2001. As for 2001, in 36 out of the 101 cases considered, the ARIMA-based strategy gives higher Sharpe ratios than those from the NN-trading rule, in 18 cases the opposite is true, and in the remaining 36 cases both strategies yield the same ratios.

Suggested Citation

  • Julián Andrada Félix & Fernando Fernández Rodríguez & María Dolores García Artiles, 2004. "Non-linear trading rules in the New York Stock Exchange," Documentos de trabajo conjunto ULL-ULPGC 2004-05, Facultad de Ciencias Económicas de la ULPGC.
    • Handle: RePEc:can:series:2004-05
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    References listed on IDEAS

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    Keywords

    Technical trading rules; Nearest neighbour predictors; Security markets;
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