Stephen J. Brown, William N. Goetzmann, Alok Kumar
ABSTRACT
Alfred Cowles' (1934) test of the Dow Theory apparently provided strong
evidence against the ability of Wall Street's most famous chartist to forecast
the stock market. In this paper we review Cowles' evidence and find that
it supports the contrary conclusion - that the Dow Theory, as applied by
its major practitioner, William Peter Hamilton over the period 1902 to
1929, yielded positive risk-adjusted returns. A re-analysis of the Hamilton
editorials suggests that his timing strategies yield high Sharpe ratios
and positive alphas. Neural net modeling to replicate Hamilton's market
calls provides interesting insight into the nature and content of the Dow
Theory. This allows us to examine the properties of the Dow Theory itself
out-of-sample.
Subject: Investments/Market Efficiency; Investments/Predictability of Asset Returns (Empirical)
Brown: (212)998-0306 sbrown@stern.nyu.edu
http://www.stern.nyu.edu/~sbrown/sbrown.html
Goetzmann: (203) 432-5950 william.goetzmann@yale.edu
http://www.viking.som.yale.edu/
Kumar: (203) 432-8886 alok.kumar@yale.edu
http://www.pantheon.yale.edu/~ak237
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