Profitability of the moving average strategy and the episodic dependencies : empirical evidence from European stock markets

Abstract

Numerous recent studies are emphasizing the existence of different stock price behaviors, namely long random walk sub periods alternating with short ones characterized by strong linear and/or nonlinear correlations. All these studies suggest that these serial dependencies have an episodic nature. In this paper we investigate the profitability of an optimum moving average strategy selected from 15,000 combinations on the main European capital markets considering the episodic character of linear and/or nonlinear dependencies, the period under study being 1997-2008. The empirical results are consistent the assumptions made by the Adaptive Markets Hypothesis (AMH) of Lo (2004) regarding the fact that profit opportunities do exist from time to time. More than that, the paper proves that the profitability of those strategies is mainly due to nonlinear episodic dependencies.