The market refers to the S&P 500 index SPY, which is an important benchmark of US stock performance. The following problem is of great interest: is there any trading system that can “beat” the market consistently? Proponents of the random walk hypothesis (RWH) and efficient market hypothesis (EMH) assert that stocks take an unpredictable path, and that it is impossible for a trader to outperform the overall market in the long run because stocks always trade at their fair values on stock exchanges. Therefore, the buy and hold (BH) investor has the best strategy.
This paper showcases a website (GeometricWavelet.com) containing an explicit wavelet trading strategy (WT) that “beats” the market consistently, contradicting the above assertion. The data set of SPY historical prices is used to show that WT “beats” the market. This data set is then fitted with a Geometric Brownian motion (GBM). Simulation shows that WT always outperforms the fitted GBM eventually and has larger risk adjusted returns. The numbers generated show that BH’s performance is far inferior to WT’s in the long run.