A real-time trading rule

    Research output: Working paper

    Abstract

    If prices of assets are not aligned to their net present value, a trading strategy may be implemented when actual prices revert to fundamentals. A real-time trading strategy is introduced based on the assumption that reversion occurs in later periods. The fundamental price is constructed in real time using the net present value approach which requires the series for expected dividends, expected returns and expected dividend growth rate. These series, typically unobservable, are derived from a structural state space model. A battery of tests comparing the rule to the passive Buy and Hold Strategy illustrates that the rule is marginally better for shorter horizons.
    Original languageEnglish
    Place of PublicationMunich
    PublisherUniversity Library of Munich, Germany
    Number of pages30
    Publication statusPublished - 2010

    Publication series

    NameMPRA Paper
    No.27148

    Keywords

    • Trading Rule
    • Net Present Value
    • State Space Modeling

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  • Cite this

    Rambaccussing, D. (2010). A real-time trading rule. (MPRA Paper; No. 27148). University Library of Munich, Germany. http://ideas.repec.org/p/pra/mprapa/27148.html