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To return or not return - Trend spotting in the Swedish market

Fulgentiusson, Henrik and Erlesand, Lenny LU (2010) NEKK01 20092
Department of Economics
Abstract
The following essays checks whether the Swedish stock market (represented by OMXS30) supports the weak efficiency of the EMH by observing whether the stocks contain a unit root and whether one can use trading strategies to create abnormal profits. The AR(1) model of the stock prices have a unit root coefficient very close to 1, thus they are trend stationary but have a very long memory. This model suffers from autocorrelation (AC) and heteroskedasticity, (H) and thus a GARCH(1,1) model and an IGARCH(1,1) were used in order to rectify this. For the GARCH(1,1) model, only a few of the series suffered from AC and H, whilst the IGARCH was basically free from both. When using the strategy of only buying winners, we obtain positive returns for... (More)
The following essays checks whether the Swedish stock market (represented by OMXS30) supports the weak efficiency of the EMH by observing whether the stocks contain a unit root and whether one can use trading strategies to create abnormal profits. The AR(1) model of the stock prices have a unit root coefficient very close to 1, thus they are trend stationary but have a very long memory. This model suffers from autocorrelation (AC) and heteroskedasticity, (H) and thus a GARCH(1,1) model and an IGARCH(1,1) were used in order to rectify this. For the GARCH(1,1) model, only a few of the series suffered from AC and H, whilst the IGARCH was basically free from both. When using the strategy of only buying winners, we obtain positive returns for all periods and statistical significance for our 3- , 6- and 36 month periods on a 5% test-level. The results of our 3 month portfolios yields an average return of 3.79% , beating the market by 4,92% and shows a strong statistical significance on the 5 %-level. Our loser portfolios are only profitable during our shortest- (1 month) and longest (36 months) investment horizons and only significant on the latter. The returns on 3- and 6 months are both negative. In comparison to the market, the Sharpe-ratios for all strategies except the 3- and 6 month loser-strategy suggest that they are better investment alternatives (Less)
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author
Fulgentiusson, Henrik and Erlesand, Lenny LU
supervisor
organization
course
NEKK01 20092
year
type
M2 - Bachelor Degree
subject
keywords
economic policy, economic systems, economic theory, econometrics, Economics, efficient market hypothesis (EMH), contrarian strategy, momentum, Random Walk, mean reversion, Sharpe Ratio, Nationalekonomi, ekonometri, ekonomisk teori, ekonomiska system, ekonomisk politik
language
English
id
1848335
date added to LUP
2010-05-20 00:00:00
date last changed
2011-06-01 12:43:59
@misc{1848335,
  abstract     = {The following essays checks whether the Swedish stock market (represented by OMXS30) supports the weak efficiency of the EMH by observing whether the stocks contain a unit root and whether one can use trading strategies to create abnormal profits. The AR(1) model of the stock prices have a unit root coefficient very close to 1, thus they are trend stationary but have a very long memory. This model suffers from autocorrelation (AC) and heteroskedasticity, (H) and thus a GARCH(1,1) model and an IGARCH(1,1) were used in order to rectify this. For the GARCH(1,1) model, only a few of the series suffered from AC and H, whilst the IGARCH was basically free from both. When using the strategy of only buying winners, we obtain positive returns for all periods and statistical significance for our 3- , 6- and 36 month periods on a 5% test-level. The results of our 3 month portfolios yields an average return of 3.79% , beating the market by 4,92% and shows a strong statistical significance on the 5 %-level. Our loser portfolios are only profitable during our shortest- (1 month) and longest (36 months) investment horizons and only significant on the latter. The returns on 3- and 6 months are both negative. In comparison to the market, the Sharpe-ratios for all strategies except the 3- and 6 month loser-strategy suggest that they are better investment alternatives},
  author       = {Fulgentiusson, Henrik and Erlesand, Lenny},
  keyword      = {economic policy,economic systems,economic theory,econometrics,Economics,efficient market hypothesis (EMH),contrarian strategy,momentum,Random Walk,mean reversion,Sharpe Ratio,Nationalekonomi,ekonometri,ekonomisk teori,ekonomiska system,ekonomisk politik},
  language     = {eng},
  note         = {Student Paper},
  title        = {To return or not return - Trend spotting in the Swedish market},
  year         = {2010},
}