Chasing trends: recursive moving average trading rules and internet stocks

Performance of technical analysis in growth and small cap segments of the US equity market

“…They use the random walk evidence along with the high idiosyncratic volatility to explain the dismal performance of trading rules in their sample. Fong and Yong (2005) also document that a portfolio of Internet stocks is more likely to deviate from the random walk behavior rather than an individual stock in that portfolio. Such evidence would serve as an indication that trend-chasing trading rules will be more effective if applied to a portfolio of related stocks rather than to each stock in that portfolio individually.…”

“…On top of it, aggregating stocks into industry and sector portfolios largely eliminates the firm-specific components of returns. Fong and Yong (2005) apply a set of 840 moving average rules to a sample of 30 leading Internet stocks over the 1998-2002 period and discover that most of those stocks behave as random walks. They use the random walk evidence along with the high idiosyncratic volatility to explain the dismal performance of trading rules in their sample.…”

“…Whereas trading of the portfolios of individual stocks may require significant transaction costs, an indexed portfolio, if such is available, can be traded at a relatively low cost. Fong and Yong (2005) suggest that a 0.25% single trip transaction cost is approximately equal to the sum of online commissions and bid-ask spread for buying and selling a $10,000 investment in an actively traded stock index fund. Dellva (2001) estimates that one-way transaction costs that also take into account bid-ask spread for a widely held and actively traded exchange-traded fund such as the Standard and Poor's Depository Receipts (SPDR) range from 0.5% for a $1000 investment to less than 0.1% for a $100,000 investment.…”

Investing in European stock markets for high-technology firms

“…A detailed analysis of such forecasting informs about whether investors could have exploited stock return predictability to set up profitable simple trading rules. Thus, our study adds to the recent studies of out-of-sample predictability of stock returns (see inter alia, Breen et al (1990), Timmermann (1995, 2000), Bossaerts and Hillion (1999), Goyal and Welch (2003), Fong and Yong (2005), and Cooper et al (2005)). …”

“…If it is negative the investor invests in bonds. Thus, our investor only considers simple switching-rules (see Fong and Yong (2005) for more complex moving-average-based trading rules). We assumed that the investor does not make use of short selling, nor does the investor use leverage when de-8 ciding whether to invest in stocks.…”