CRISMA revisited

Abstract

The CRISMA multiple component trading system (Pruitt and White, Journal of Portfolio Management, 14, 55-8, 1988) seeks to identify equity trades by using jointly the three technical filters of the relationship between 50 day and 200 day moving averages, relative strength and cumulative volume. The current study re-examines the CRISMA system using US data over the period 1988-1996. Overall, trades identified by the system were profitable, on average, but only prior to any adjustment for market movements and risk; after adjustment, they ceased to be so even with an assumption of zero transaction costs. Performance of the system was not stable over time and trades on larger companies fared better than small. Further investigation of the multi component nature of CRISMA revealed that it is, in large part, a moving average trading rule. In terms of the number of trades identified, the effect of the cumulative volume and relative strength components is relatively minor and the contribution of these two filters to observed returns is negative. Overall, the current study finds little support for the CRISMA trading system once market movements, risk and transaction costs are taken into account. The results are consistent with market efficiency.

Is the CRISMA technical trading system profitable?

“…They also find that while there is evidence of profitability from the application of CRISMA to the options market, the proportion of successful trades is not statistically significantly different from 0.5. Goodacre and Kohn-Speyer (2001) find a similar result using U.S. data for 322 stocks from the S&P 500 over the 1988-1996 period. Trades identified by the system are profitable on average, but only prior to any adjustment for market movements and risk.…”

“…The profitability of the rule remains statistically significant with round-trip transaction costs of 0.5% (annualized profit declines to 5.8%), but profits are not significantly different from zero once transaction costs increase to 1%. Pruitt and White (1988) do not report equivalent results in their paper, but these profits are considerably lower than those documented by Goodacre and Kohn-Speyer (2001). They find annualized profits ranging from 17.6% for zero transaction costs to 6.2% for transaction costs of 2%.…”

“…This fact that virtually all their stocks had traded options available is further evidence that these papers are based on large stocks. 2 Goodacre et al (1999) and Goodacre and Kohn-Speyer (2001) also study large stocks due to their focus on the constituents of major share indices. The fact that the size differences do not appear to explain the previous divergent results is further motivation to study CRISMA profitability across stocks of different liquidity to see if this might explain the varying results.…”

“…More recently, doubt has been cast on the profitability of CRISMA. Goodacre, Bosher, and Dove (1999) find that CRISMA is not profitable on the UK equity market and Goodacre and Kohn-Speyer (2001) find that CRISMA is not profitable on a different sample of US stocks.…”

“…In contrast to Goodacre and Kohn-Speyer (2001) who select a sample of stocks from a universe of stocks that were still listed at the end of their sample period we impose no such restriction. This is a vital protection against survivorship bias.…”