Robustness of mathematical models and technical analysis strategies

TL;DR

This paper compares the robustness of an optimal trading strategy under parameter mis-specification with a technical analysis approach within a stochastic asset model, finding the technical method more resilient in practice.

Contribution

It introduces a comparison framework for optimal and technical trading strategies in a stochastic model with unobservable trends, highlighting the robustness of cross moving averages.

Findings

Cross moving averages strategy is more robust than the optimal strategy under parameter mis-specification.

Asymptotic expectation formulas are derived for both strategies.

Numerical examples support the robustness conclusion.

Abstract

The aim of this paper is to compare the performances of the optimal strategy under parameters mis-specification and of a technical analysis trading strategy. The setting we consider is that of a stochastic asset price model where the trend follows an unobservable Ornstein-Uhlenbeck process. For both strategies, we provide the asymptotic expectation of the logarithmic return as a function of the model parameters. Finally, numerical examples find that an investment strategy using the cross moving averages rule is more robust than the optimal strategy under parameters mis-specification.