Combining DVaR and Moving Average Strategies for Market Timing - Student's Post

Combining the trading strategies of DVaR and Moving Average produces this result on the STI from 1975 to present:
The relevant parameters are 5 and 25 for the short and long MA signals, and 1.5% for DVaR. Summary statistics are presented here:

Clearly we already knew that Moving Avg and DVaR strategies were going to improve both Return and Sharpe. But now we are able to put these in perspective when we linearly combine (multiply) the trading signals that result from the two strategies. We are able to see a few surprising things:

• DVaR massively decreases the “fat-tailed” distribution of the STI; Moving Average also does the same to a small extent.
• Curiously, while DVaR decreases kurtosis, it increases daily standard deviation. This means that less of the daily variance is actually a result of infrequent extreme events, which we like.
• Moving Average massively decreases the negative skew of the STI; DVaR does the same to a small extent. This result is corroborated by the “Worst Day” statistic.
• Despite the only incremental rise in Sharpe when adding DVaR onto Moving Avg for the Combined strategy, we see a large rise in CAGR of about 3%. This may be attributed to volatility drag, but of the second degree – because DVaR lowers the Kurtosis of the combined strategy, annual return is increased. This effect might even be called “kurtosis drag”.

The matlab program to do this is available upon request.