A theoretical analysis of trading rules: an application to the moving average case with Markovian returns

Abstract

A general framework for analysing trading rules is presented. We discuss different return concepts and different statistical processes for returns. We then concentrate on moving average trading rules and show, in the case of moving average models of length two, closed form expressions for the characteristic function of realized returns when the underlying return process follows a switching Markovian Gaussian process. An example is included which illustrates the technique.

Keywords:

• Moving Averages
• Switching Markov Models
• Trading Rules