Adaptive Trading Rules and Dynamic Market Disequilibrium

Disequilibrium models of security market operation have indicated that, when the information dissemination process is delayed by market friction, the market will be in a disequilibrium condition. Trading rules should be adaptive to changing levels of new information. An economic test (under mechanic...

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Journal Title: Applied Economics Vol. 16; no. 1; pp. 1 - 14
Author: D. Nawrocki
Format: Article
Published: Feb 1984
Subjects:
Summary: Disequilibrium models of security market operation have indicated that, when the information dissemination process is delayed by market friction, the market will be in a disequilibrium condition. Trading rules should be adaptive to changing levels of new information. An economic test (under mechanical trading rules) of the disequilibrium models is performed using the parabolic mask (PMASK) cumulative sum procedure. Performance of the adaptive and nonadaptive PMASK trading rules is simulated from a 50-security sample for the period 1926-1975. Results show that adaptive trading strategies outperformed nonadaptive rules using both terminal wealth and reward of variability ratios. The adaptive rules did not outperform the buy-and-hold strategy, however. Research on more complex adaptive rules, time series models, and dependence lag structure is needed.
ISSN: 0003-6846