The moving average rule : a stock selection approach

Abstract

This paper studies and compares the performance of different Moving Average Rules applied to a basket of selected stocks between 1998 and 2012. It is shown that the selection of stocks through the analyst consensus recommendations with periodical rebalancing is profitable and performs better than the buy-andhold benchmark. Furthermore, the application of Moving Average Rules displays potential to improve the risk adjusted performance of the basket of selected stocks, with a Sharpe ratio of 0.77. It is also shown that the Moving Average Rules outperform the benchmark in bearish periods, with poorer results being reached during bullish periods. All the results are computed in a real-life setting accounting transaction costs inferred from the market. Longer Moving Average Rules tend to outperform the shorter ones, and display less sensibility to transaction costs.