Bollinger Bands

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Combining value averaging and Bollinger

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Authors: Lai, Hung-Cheng1 (AUTHOR) tctseng@nit.zju.edu.cn

Tseng, Tseng-Chan2 (AUTHOR)
Huang, Sz-Chi1 (AUTHOR)
Source: Applied Economics. Aug2016, Vol. 48 Issue 37, p3550-3557. 8p. 7 Charts, 1 Graph.
Document Type: Article
Subject Terms: *Exchange traded funds

*Behavioral economics
*Dollar cost averaging
*Decision making in investments
*Bear markets
Author-Supplied Bollinger Band

Keywords: dollar cost averaging
G10
P45
Value averaging
Abstract: The decision-making of investors is highly influenced by their feelings. According to

behavioural finance, investor greed and fear would form irrational behaviour and
affect their portfolio allocation. Although well-known mechanical investment strategy
of dollar cost averaging (DCA) and value averaging (VA) could eliminate the problems
of when to purchase, there are still some disadvantages to consider. For example,
using a DCA strategy may be able to decrease volatility in portfolio so as to not effect
investment decision, but it gives no rule for selling and may increase the opportunity
cost of time if investors start deducted at peak prices. On the other hand, VA gives
more aggressive sell signals to control the value of the portfolio to the level desired,
but the investor may not have enough money purchase of a large number of shares in
sharp decline period. Therefore, we use VA as main strategy and Bollinger Band as
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assist indicator for check for volatility for entry or exit. Through analysis and
simulation, the new strategy we design does improve the performance during both
bull and bear market periods. [ABSTRACT FROM AUTHOR]
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1
Author Affiliations: Department of Finance, Overseas Chinese University, Taichung, Taiwan
2
School of Economics and Trade, Ningbo Institute of Technology, Zhejiang University,
Ningbo, China
Full Text Word 4383

Count:
ISSN: 0003-6846
DOI: 10.1080/00036846.2016.1142653
Accession Number: 116265647
Publisher Logo:
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Combining value averaging and Bollinger Band

for an ETF trading strategy.
Listen American Accent
The decision-making of investors is highly influenced by their feelings. According to behavioural

finance, investor greed and fear would form irrational behaviour and affect their portfolio allocation.
Although well-known mechanical investment strategy of dollar cost averaging (DCA) and value
averaging (VA) could eliminate the problems of when to purchase, there are still some
disadvantages to consider. For example, using a DCA strategy may be able to decrease volatility in
portfolio so as to not effect investment decision, but it gives no rule for selling and may increase the
opportunity cost of time if investors start deducted at peak prices. On the other hand, VA gives more
aggressive sell signals to control the value of the portfolio to the level desired, but the investor may
not have enough money purchase of a large number of shares in sharp decline period. Therefore,
we use VA as main strategy and Bollinger Band as assist indicator for check for volatility for entry or
exit. Through analysis and simulation, the new strategy we design does improve the performance
during both bull and bear market periods.
Keywords: Value averaging; Bollinger Band; dollar cost averaging
I. Introduction
Investors are often affected by psychological factors in strategy making. Relevant studies of
behavioural finance have proved such irrationality of investors. When it comes to investment, an
individual tends to see the loss or profit through a reference point, instead of through the final wealth
level as assumed in the traditional utility theory. As a result, the strategy-making of the investor may
vary with different reference point. In other words, the decision-making mode of the investor is
influenced by the greed and weaknesses in human nature, and one tends to make irrational
decisions. Therefore, the investment strategy of dollar cost averaging (DCA) of fixed-amount
investment in fixed term seems to be able to avoid irrational behaviour of investors.
DCA method was first proposed by Constantinides ([ 7]), who suggested that DCA method can
minimize the risks involved in investment. However, later studies have argued that DCA cannot
achieve good returns at all times. Moreover, DCA cannot allow the investors to know the best time to
redeem. Assuming that the market encounters systematic risks like the subprime mortgage crisis, in
which the market declines sharply in a sustained period, if the investors do not redeem at the best
timing, the assets would continue to shrink. Even losses caused by corrosion of principal may occur
and opportunity cost in the investment time will be increased.
Compared to DCA, although value averaging (VA) is also one of formula strategies, it is often
combined with DCA and portfolio rebalancing. It can force the investors to buy more units when the
price is low, and can regularly adjust the configuration of investment portfolio, in order to restore its
specific structural features and achieve the trading strategy of 'buy low and sell high'. VA is proposed
by Michael Edleson ([ 8]), and is the extension of DCA. Its empirical results suggest that VA
achieves better rate of return on investment.
However, there are two problems in VA investment. Firstly, since the amount invested in each period
using VA method differs, if the market keeps declining, VA will suggest buying more units. If the
investors do not have sufficient fund, the set value target will not be achieved; hence, it may not be
executed by average investors. Secondly, if the market keeps rising for a long period of time, the
investment return using VA will not be better than that of DCA. To solve this problem, this article
uses Bollinger Band, which defines relative tops and bottoms, as the supplemental indicator. Since
Bollinger Band has a band (channel) between the upper and lower bound, the point for decision-
making on buy and sell can be clearly seen, thus complementing the methodological shortcoming of
VA. This study uses VA as the benchmark strategy and Bollinger Band as the supplemental strategy
for simulation, so as to provide investors a more complete trading strategy.
II. Literature review

In recent years, the technical analysis has been investigating in literature review. Brock, Lakonishok,
and LeBaron ([ 3]) test two of the simplest and most popular trading rules-moving average and
trading range break-by utilizing the Dow Jones Index from 1897 to 1986. Standard statistical
analysis is extended through the use of bootstrap techniques. Overall, their results provide strong
support for the technical strategies. The returns obtained from these strategies are not consistent
with four popular null models: the random walk, the AR ( 1), the GARCH-M and the exponential
GARCH. Buy signals consistently generate higher returns than sell signals, and further, the returns
following buy signals are less volatile than returns following sell signals.
On the other hand, Brennan, Li, and Torous ([ 2]) explore whether the strategy is about another
instance of irrational behaviour by individual investors, or whether it is an investment heuristic that
has survival value in an environment in which security prices exhibit mean reversion behaviour that
has only belatedly been recognized by academic theorists. Our evidence supports the view that the
uninformed individual investors who follow this strategy in purchasing individual stocks to add to an
existing portfolio are better off than if they followed the 'rational' strategies traditionally recommended
by academics. Marshall ([11]) compares two 'formula' or mechanical investment techniques, DCA
and a relatively new proposal, value averaging, to a form of random investing to determine if any
technique yields superior investment performance. Results indicate that VA does provide superior
expected investment returns when investment prices are quite volatile and over extended investment
time horizons with little or no increase in risk. These results are quite surprising based on other
research supporting EMH, and the fact that any actual performance attributed to VA does not result
from any temporary inefficiency in market prices.
In a paper that stimulated broad interest, Marshall ([12]) tests use historical market prices of chosen
stock and commodity indices. Results seem to indicate that VA does provide a small but still superior
expected investment returns under most conditions. Due to the relatively few real world 'experiences'
available, these results can only be anecdotally and not statistically confirmed at a high confidence
level. Actual investment results reported here are consistent with prior statistically significant
research supporting a small investment performance advantage for VA versus other techniques
using both simulation and approximate market activity.
Chen and Estes ([ 4]) develops a feasible value-averaging strategy for average 401 (k) investors by
using the equity mutual funds as the driving force and the monthly 401 (k) contributions and the
bond account as the natural capital reserve. This feasible approach is called 401 (k) VA. Using
monthly historical return data, simulations show that the 401 (k) value-averaging strategy generates
a higher terminal value for the 401 (k) retirement portfolio than traditional DCA. Based on the total
risk and risk/reward comparisons such as the Sharpe ratio and the Sortino ratio, it is optimal to follow
the 401 (k) value-averaging strategy with a target annual growth rate between 8% and 12%.
Besides, Leung and Chong ([10]) endeavour to compare the profitability of moving average
envelopes and Bollinger Bands. Despite the fact that Bollinger Bands can capture sudden price
fluctuations which moving average envelopes cannot, our study reveals that Bollinger Bands do not
outperform the moving average envelopes.
Moreover, Chen and Estes ([ 5]) conducts Monte Cm-lo simulations to compare the performances of
three popular asset allocation strategies in the financial press, that is, dollar-cost-averaging, VA, and
proportional rebalancing, in the 401(k) plan framework. Value-averaging generates a higher terminal
value for a retirement portfolio than the other two strategies. Total risk of the portfolio is lower under
VA than under DCA. VA provides the highest reward-to-risk ratio as well as the highest likelihood of
meeting the investment goal.
III. Research methodology
Research sample
This study selects Class 43 iShares equity exchange-traded funds (ETFs) for simulation of
investment strategy-making, with the term of study being day information of 11 years from October
2003 to December 2014. The target of this study is equity ETFs issued by iShares, 43 funds in total.
The sample for this study mainly uses market capitalization, style and region as the categorization
standard. Market capitalization is ETF for nations with single investments, covering Asia, Europe and
America. ETF classified by style is analysed by categorizing the American market companies into
large-cap, mid-cap and small-cap. Region takes seven classes of regional ETFs as representative.
Table 1 shows the samples. MSCI Australia Index Fund and MSCI Singapore Index Fund are two of
the earliest founded ones, both of them were founded on 12 March 1996; S&P Global 100 Index
Fund was the one founded last, on 5 December 2000.
Table 1. Research sample.
Fund name SymbolFund name Symbol

Market capitalization
MSCI Australia EWA MSCI Austria Investable MarketEWO
MSCI Canada EWC MSCI Spain EWP
MSCI Sweden EWD MSCI France EWQ
MSCI Germany EWG MSCI United Kingdom EWU
MSCI Hong Kong EWH MSCI Mexico Investable MarketEWW
MSCI Italy EWI MSCI Singapore EWS
MSCI Belgium Investable Market EWK MSCI Taiwan EWT
MSCI Switzerland EWL MSCI South Korea EWY
MSCI Malaysia EWM MSCI Brazil EWZ
MSCI Netherlands Investable MarketEWN
Style
Large-cap
S&P 500 Value IVE Russell 1000 Value IWD
iShares Core S&P 500 ETF IVV Russell 1000 Growth IWF
S&P 500 Growth IVW S&P 100 OEF
Russell 1000 IWB
Mid-cap
iShares Core S&P Mid-Cap ETF IJH S&P MidCap 400 Growth IJK
S&P MidCap 400 Value IJJ
Small-cap
iShares Core S&P Small-Cap ETF IJR Russell 2000 IWM
S&P SmallCap 600 Value IJS Russell 2000 Value IWN
S&P SmallCap 600 Growth IJT Russell 2000 Growth IWO
Fund name SymbolFund name Symbol

Regional
MSCI EMU EZU Russell 3000 Value IWW
S&P Europe 350 IEV Russell 3000 Growth IWZ
S&P Global 100 IOO Dow Jones U.S. IYY
Russell 3000 IWV
This article selects ETF as the sample based on the following two considerations: firstly, ETF
belongs to passive operation strategy, the trend of its returns are similar to the market and is not
influenced by stock-picking and market timing abilities of the fund manager, so as not to affect the
results of this study. Secondly, while executing VA, if the assets of the current period is in the phase
of fast accumulation, the investor must redeem, which generates extra trading cost and limitation.
For example, some common funds have redemption limitation for a certain period, and some of them
charge for extra redemption fees. Therefore, the cost of taking ETF as the subject matter of the
study is lower, and the flexibility of trading is increased without the limitation of redemption period.
Research methodology
This article aims to explore the optimal strategy for mechanical investment methods, thus, adopts
three modes for simulation test. The first one is simple inspection using VA and DCA. The second
uses bonds as the investment target in addition to the above two methods. For the first period, each
of stock ETF and bond ETF takes up 50% of fund investment, and the trading principle for the
second period and later periods, the signal for application and redemption of VA is the main strategy
making point. If there is still fund remained after deduction of the amount applied, the remainder is
input to bond ETF. However, when the fund is insufficient, the funding gap is filled by bond
redemption. Therefore, the main reason for adding bond is to avoid forced suspension of investment
due to insufficient investment amount caused by market declining, and the remaining or redeemed
fund is put on bonds with lower risks. The third method is to add Bollinger Band and buy according
to the trace drew by SD. The amount of mark-up or mark-down is based on the 50% of increase of
VA assets value of each period. Before VA and Bollinger Band are input with the same operational
principle, the remaining fund will not be put into bonds or used as supplement in case of
insufficiency.
Value averaging
Value averaging, also known as dollar VA (DVA), is a technique of adding to an investment portfolio
to provide greater return than similar methods such as DCA and random investment. It was
developed by former Harvard University Professor Michael E. Edleson. VA is a formula-based
investment technique where a mathematical formula is used to guide the investment of money into a
portfolio over time. With this method, investors contribute to their portfolios in such a way that the
portfolio balance increases by a set amount, regardless of market fluctuations. As a result, in periods
of market declines, the investor contributes more, while in periods of market climbs, the investor
contributes less. In contrast to DCA, which mandates that a fixed amount of money be invested at
each period, the VA investor may actually be required to withdraw from the portfolio in some periods.
According to the article form Beattie ([ 1]), suppose you determine that the value of your investment
will rise by $500 each quarter as you make additional investments. In the first investment period, you
would invest $500, say at $10 per share. In the next period, you determine that the value of your
investment will rise to $1000. If the current price is $12.50 per share, your original position comes to
be worth $625 (50 shares times $15), which only requires you to invest $375 to put the value of your
investment at $1000. This is done until the end value of the portfolio is reached. As you can see in
this example, you have invested less as the price has risen, and the opposite would be true if the
price had fallen. Therefore, instead of investing a set amount each period, a VA strategy makes
investments based on the total size of the portfolio at each point. Table 2 is an expanded example of
VA method Edleson ([ 9]).
Table 2. Value averaging method.
Period Market priceAmount requiredShares ownedShares purchasedAmount invested during period

1 $10 $5000 500 500 5000
2 $7 $10,000 1429 929 6500
3 $13 $15,000 1154 (275) −3571
4 $11 $20,000 1818 664 7308
5 $12 $25,000 2083 265 3182
Current value: 21,818
Total cost: 6582
Average cost: 10.60
IRR: 14.10%
2 Note: internal rate of return (IRR).
Most of the shares have been bought at very low prices, thus maximizing your returns when it comes
time to sell. If the investment is sound, VA will increase your returns beyond simply DCA for the
same time period. And it does so at a lower level of risk. In addition, in certain circumstances, such
as a sudden gain in the market value of your stock or fund, VA could even require you to sell some
shares without buying any (sell high, buy low). VA is a simple, mechanical type of market timing that
helps to minimize timing risk.
Bollinger Bands
Bollinger Bands is a technical analysis tool invented by John Bollinger in the 1980s. This is one of
the most popular technical analysis techniques. Having evolved from the concept of trading bands,
Bollinger Bands and the related indicators %b and bandwidth can be used to measure the 'highness'
or 'lowness' of the price relative to previous trades. Because SD is a measure of volatility, Bollinger
Bands adjust themselves to the market conditions. When the markets become more volatile, the
bands widen, and during less volatile periods, the bands contract. The tightening of the bands is
often used by technical traders as an early indication that the volatility is about to increase sharply.
The closer the prices move to the upper band, the more overbought the market, and the closer the
prices move to the lower band, the more oversold the market.[ 1] There are three components to the
Bollinger Band indicator:
Middle band = 20-day simple moving average (SMA)
Upper band = 20-day SMA + (20-day SD of price × 2)
Lower band = 20-day SMA − (20-day SD of price × 2)
Bollinger Bands (in blue) are shown in the chart of the E-mini S&P 500 Futures contract in Figure 1.
Graph: Figure 1. Bollinger Bands.[ 2]
IV. Empirical results and analysis

This article aims to understand and apply a DCA method that is different from those commonly used
by investors, and to investigate a VA strategy to solve inactivation of DCA. Past studies have proved
that VA is able to achieve higher rate of return; however, VA is also a mechanical strategy, unable to
dynamically adjust the timing of buy and sell. Therefore, under the guidance of technical indicators,
VA strategy can be adjusted to have better ability to select time. This article selects technical
indicator of Bollinger Band for investment analysis to see if the improved VA is able to achieve better
risk premium and stable rate of investment return. According to the categorization of ETF of iShares,
this article takes ETF of single investment nations for simulation. This category of fund is classified
as Market Capitalization. Secondly, investigation is made on fund upon large-cap, mid-cap, and
small-cap by style. Finally, this study also uses the region type of ETF in order to avoid the
influences of single market or styles of investment. The three periods of bull, bear and correction are
used for examination in order to achieve stable results.
Market capitalization
For market capitalization ETF for countries with single investments, there are 7 ETFs of Asian and
Oceania countries, 10 ETFs of European countries, and 3 ETFs of American countries. The ETFs
are divided in to tri-mode internal rate of return (IRR) simulation. According to Table 3, IRR of VA is
greater than that of DCA, indicating that VA has a higher rate of return. This finding is consistent with
previous literature. For original modes, the first three ETFs with greater pay differences between the
VA and DCA are EWZ, EWY, EWW. After adding the bonds, three ETFs with larger difference
between the two are EWI, EWP, EWO. In the view of Mode 1 and 2, after adding bonds, it is helpful
to calculate the rate of return on investment of 70% sample fund. By contrast, the use of VA strategy
has a larger difference. The first three ETFs with larger return promotion are 0.978% of EWI, 7.156%
EWP and 8.841% of EWO, which has same points with that of DCA method. However, the
magnitude is relatively small, that is 9.91%, 9.64%, 8.824%, respectively. Intuitively, as DCA is a
stable investment, with conservative bond investments, the effect of the interaction is not very
obvious.
Table 3. Market capitalization.
Level IRR (%)BOND IRR (%)BB and Bond IRR (%)
ETF IRR (%)BOND

Level VA IRR (%)BB
DCAand Bond IRR (%) VA DCA VA DCA
ETF VA DCA VA DCA VA DCA

EWA 8.730 4.914 10.1955.477 10.7436.250
EWH 8.701 5.874 10.0246.223 10.4556.766
EWM 10.821 9.115 10.1428.813 10.4719.171
EWS 10.955 7.049 10.8037.150 11.168 7.618
EWT 5.014 2.021 8.758 3.289 9.651 4.553
EWY 13.073 7.610 11.695 7.597 12.2098.251
EWD 8.655 4.497 10.3265.156 11.084 6.205
EWG 6.630 2.408 9.777 3.576 10.4754.624
EWI −5.739 −9.906 5.239 −4.6716.430 −2.561
EWK 0.217 −2.642 6.775 −0.0338.108 1.998
EWL 7.215 5.287 9.118 5.766 9.562 6.332
EWN 3.294 0.153 8.246 1.927 9.117 3.180
EWO 0.672 −4.069 7.828 −0.9969.194 1.304
EWP −1.413 −5.926 7.428 −2.2128.143 −0.978
EWQ 1.599 −1.893 7.770 0.483 8.614 1.795
EWU 2.599 0.506 7.428 2.181 8.353 3.464
EWC 8.221 4.526 9.689 5.178 10.2005.838
EWW 16.836 11.796 12.47711.034 12.68811.303
EWZ 16.282 6.257 11.291 6.524 11.496 6.837
Finally, the simulation is conducted according to Bollinger Band index. The first three ETFs with
greater IRR differences between the two modes are EWP, EWI and EWO. If the comparison is
conducted by three modes, 73% of the ETF is contained in nation-type sample, and IRR shows an
increasing state. This suggests that the combination of bond with Bollinger Band in the investment
can effectively improve the return on investment, thus turning ETF from negative rewards to positive
rewards, namely increasing EWI from −5.739% to 6.430%. The loss of DCA decreases from
−9.906% to −2.561%, while VA of EWP increases from −1.413% to 8.143%. Similarly, DCA
decreases from −5.926% to −0.978%.
Style type
Style type is divided into large-cap, mid-cap and small-cap. In terms of different scale, ETF is the
investment in large-cap stocks, with a larger liquidity than that of small and mid-cap stocks. Because
of lower liquidity of mid-cap stock, ETF value has large fluctuations, while small-cap stocks have the
lowest liquidity and the highest risk. According to Table 4, in terms of large-cap stocks, if the value is
average, the average return of VA is high than that of DCA. From the point of view of original model,
the first three ETFs with greater IRR differences between the VA and DCA are IVE, IWD, IWB, while
that of Mode 2 and 3 are IVE, IWD, OEF. In terms of the original model and bonds, the first three
ETFs of VA are 4.275% of IVE, 4.038% of IWD, 3.661% of OEF, the same as DCA. For Boolean
indicators, due to improved operating strategy, the first three ETFs of VA are IVE, IWD and OEF.
Table 4. Style type.
Level IRR (%) Bond IRR (%)BB and Bond IRR(%)

Large-cap ETF
IVE 3.542 1.846 7.817 3.1608.665 4.298
IVV 4.836 3.486 8.211 4.3858.946 5.334
IVW 6.114 5.014 8.671 5.5549.268 6.296
IWB 5.197 3.771 8.404 4.6019.138 5.547
IWD 3.890 2.272 7.928 3.4758.772 4.591
IWF 6.506 5.207 8.920 5.7049.582 6.519
OEF 4.261 3.086 7.922 4.0838.574 4.937
Mid-cap ETF
IJH 8.426 6.350 9.947 6.59710.4517.217
IJJ 6.980 4.788 9.427 5.38010.1616.321
IJK 9.810 7.813 10.4457.76010.7788.161
Small-Cap ETF
IJR 8.251 5.859 10.1336.21110.6926.931
IJS 7.490 4.866 9.960 5.43910.6276.341
IJT 9.087 6.874 10.3407.01110.7347.510
IWM 7.174 4.464 9.830 5.13010.5266.082
IWN 5.946 3.133 9.360 4.11910.2025.276
IWO 8.330 5.651 10.2856.04910.8726.824
In terms of mid-cap stocks, IRR with average overall value is greater than DCA and Bollinger Band
plus IRR of bond is greater than Mode 1 and 2. In the comparison between Boolean strategy and
original model IRR, the increase rate of VA and DCA is IJJ, IJH and IJK in the given order. ETF of
small-cap stocks has the same result. VA's IRR is higher than that of DCA, and increasing rate of
return of Mode 1 to 3 also shows an increasing state. The first three ETFs of the two strategies with
higher increase are IWN, IWM and IJS. As shown in Table 4, the VA is better than the regular quota
method, and it is once again proved that Bollinger Band is the technical strategy to increase ROI.
Different market condition

To further establish that the Bollinger Band indicator is still valid during market changing, according
to the market trends, this article divides the region types into bull, bear and correction periods for
discussion. The bull and bear periods are based on Cohen, Zinbarg, and Zeikel ([ 6]). When the
market index is up or down over three consecutive months, it is considered the beginning of bull and
bear. Non-continuous period is considered as correction. Based on this, October 2003–October
2007 is taken as correction period, November 2007–February 2009 is the bear period, March 2009–
December 2012 is the bull period.
As shown in Table 5, during the fluctuating market period, IRR difference of VA and DCA strategy is
not large. The main reason is that the net worth during the fluctuating market period has no obvious
fluctuation, thus, cannot show the benefit of 'buy low and sell high'. According to the data, the
average IRR of VA is still higher than that of DCA.
Table 5. Fluctuating market.
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Level IRR (%)Bond IRR (%)BB and Bond IRR (%)

IOO 12.826 12.823 10.12111.752 9.147 19.538
EZU 21.595 21.416 13.81018.96811.59524.875
IEV 19.105 18.867 12.71816.79911.20722.714
IWV 10.948 10.745 9.151 10.0508.466 19.247
IWW 11.545 11.179 9.349 10.4048.994 18.077
IWZ 10.425 10.328 8.984 9.710 8.615 19.004
IYY 11.219 11.040 9.283 10.2918.650 19.083
After adding bonds, the rate of return on investment declines. Intuitively, fluctuations in the market
modification diminish, and when the market stabilizes, investment should be made on risk-free
instruments, leading to lower investment return. Finally, the combination of returns after combing
DCA with Bollinger Band is significantly greater than VA. Hence, when the market has less
fluctuation, no significant difference will appear for BB, after combining with VA or DCA.
According to Table 6, in the bull market, the VA's IRR is higher than the DCA. After adding bonds,
the returns rate has improved significantly. The first three ETFs of VA and DCA are EZU, IEV and
IOO. However, the return rate of VA is larger, which is consistent with the final result, indicating that
IRR with BB technical indicators increases more. In the bull period, a better rate of return index can
be obtained when combined with BB indicator.
Table 6. Bull market.

IOO 5.858 4.387 19.69110.01022.40313.638
EZU 2.611 −0.286 19.9176.815 22.0409.860
IEV 5.353 3.281 20.2259.243 22.34012.231
IWV 11.989 10.368 21.83014.26024.77617.939
IWW 11.002 9.389 21.63013.55224.42517.144
IWZ 12.993 11.308 22.06414.94424.95318.499
IYY 11.951 10.377 21.80714.26724.58917.794
As shown in Table 7, using only VA or DCA achieves negative value of return in bear market, which
means that economic losses will be sustained using either of the strategies in market downturn.
Therefore, it is very important to choose the right time to enter the market if only mechanical
operational strategy is used. Secondly, after adding the bonds, although the loss brought by market
declining can be avoided and the return can be relatively increased, the investment return is still not
desirable. Finally, after combining technical indicator of Bollinger Band, positive returns can be
sustained even when the market is declining, in addition to high profits in bull market. The
investment return of EZU, IEV, IWW is much higher than simple use of such two methods, and EZU,
IEV and IWZ reduce relatively more losses respectively. This study proves that better returns can be
achieved with VA combining with BB as compared only VA or DCA.
Table 7. Bear market.

IOO −67.180 −67.623 5.042 −31.1207.676 −28.529
EZU −89.055 −93.327 −1.799−46.1203.865 −39.176
IEV −84.289 −86.515 −0.818−42.2580.516 −41.416
IWV −59.956 −61.810 8.035 −27.56812.303−22.831
IWW −65.951 −67.145 5.911 −30.8309.650 −26.180
IWZ −54.325 −57.009 10.063−24.59017.877−15.266
IYY −59.878 −61.647 8.127 −27.46812.054−23.178
V. Conclusion
This study provides a new investment operation to investors. The empirical results reveal that, for
both market capitalization and style type, IRR of VA is superior to DCA, and even receiving a better
return rate when combined with BB. After a further division of market period, it can be found that,
more profit can be obtained when combining with BB strategy in a bull market. Additionally, during
bear market, IRR of pure VA and DCA is in a loss state, but the loss of VA is significantly less than
that of DCA. When combining BB strategy, the loss is reduced, even some of the fund can still
receive benefits under a pessimistic market. This proves that BB's strategy combining with VA can
effectively reduce the investment risk. For these reasons, this study combines VA with BB and bond
for investments simulation, in order to achieve a better return on investment in the long run. Through
analysis and simulation, the new strategy we design does improve the performance during both bull
and bear market periods.
Disclosure statement
No potential conflict of interest was reported by the authors.
References
1 Beattie, A. 2012. "Choosing between Dollar-Cost and Value Averaging."
http://www.investopedia.com/articles/stocks/07/dcavsva.asp.
2 Brennan, M. J., F. Li, and W. N. Torous. 2005. "Dollar Cost Averaging." Review of Finance 9: 509–
535. doi:10.1007/s10679-005-4999-x.
3 Brock, W., J. Lakonishok, and B. LeBaron. 1992. "Simple Technical Trading Rules and the
Stochastic Properties of Stock Returns." TheJournal of Finance 47: 1731–1764. doi:10.1111/j.1540-
6261.1992.tb04681.x.
4 Chen, H., and J. Estes. 2007. "Value Averaging for 401(K) Plans Hakes More 'Cents' than Dollar-
Cost Averaging." Journal of Financial Planning 20: 56–59.
5 Chen, H., and J. Estes. 2010. "A Montecarlo Study of the Strategies for 401(K) Plans: Dollar-Cost-
Averaging, Value-Averaging, and Proportional Rebalancing." Financial Services Review 19: 95–109.
6 Cohen, J. B., E. D. Zinbarg, and A. Zeikel. 1973. Investment Analysis and Portfolio Management.
Homewood, AL: R. D. Irwin Co.
7 Constantinides, G. M. 1979. "A Note on the Suboptimality of Dollar-Cost Averaging as an

Investment Policy." TheJournal of Financial and Quantitative Analysis 14: 443–450.
doi:10.2307/2330513.
8 Edleson, M. E. 1988. "Value Averaging: A New Approach to Accumulation." American Association

of Individual Investors Journal 7: 11–14.
9 Edleson, M. E. 2011. Value Averaging: The Safe and Easy Strategy for Higher Investment
Returns, 35. Hoboken, NJ: Wiley.
Leung, J. M. J., and T. T. L. Chong. 2003. "An Empirical Comparison of Moving Average Envelopes
and Bollinger Bands." Applied Economics Letters 10: 339–341. doi:10.1080/1350485022000041032.
Marshall, P. S. 2000. "A Statistical Comparison of Value Averaging Vs. Dollar Cost Averaging and
Random Investment Techniques." Journal of Financial and Strategic Decision 13: 87–99.
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Footnotes
The explanations of value averaging and Bollinger Band are from both Investopedia and Wikipedia
website.
http://www.onlinetradingconcepts.com/TechnicalAnalysis/BollingerBands.html
~~~~~~~~
By Hung-Cheng Lai; Tseng-Chan Tseng and Sz-Chi Huang
Reported by Author; Author; Author
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5/3/2019 Combining value averaging and Bollinger Band for an ETF trading strategy: EBSCOhost

Combining value averaging and Bollinger

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Authors: Lai, Hung-Cheng1 (AUTHOR) tctseng@nit.zju.edu.cn

Document Type: Article

Subject Terms: *Exchange traded funds

Author-Supplied Bollinger Band

Abstract: The decision-making of investors is highly influenced by their feelings. According to

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Accession Number: 116265647

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Combining value averaging and Bollinger Band

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The decision-making of investors is highly influenced by their feelings. According to behavioural

Keywords: Value averaging; Bollinger Band; dollar cost averaging

II. Literature review

III. Research methodology

Table 1. Research sample.

Fund name SymbolFund name Symbol

Fund name SymbolFund name Symbol

Table 2. Value averaging method.

Period Market priceAmount requiredShares ownedShares purchasedAmount invested during period

2 Note: internal rate of return (IRR).

Middle band = 20-day simple moving average (SMA)

Upper band = 20-day SMA + (20-day SD of price × 2)

Lower band = 20-day SMA − (20-day SD of price × 2)

Graph: Figure 1. Bollinger Bands.[ 2]

IV. Empirical results and analysis

Table 3. Market capitalization.

Level IRR (%)BOND IRR (%)BB and Bond IRR (%)

ETF IRR (%)BOND

ETF VA DCA VA DCA VA DCA

Table 4. Style type.

Level IRR (%) Bond IRR (%)BB and Bond IRR(%)

Different market condition

Table 5. Fluctuating market.

Level IRR (%)Bond IRR (%)BB and Bond IRR (%)

Table 6. Bull market.

Level IRR (%)Bond IRR (%)BB and Bond IRR (%)

Table 7. Bear market.

Level IRR (%)Bond IRR (%)BB and Bond IRR (%)

7 Constantinides, G. M. 1979. "A Note on the Suboptimality of Dollar-Cost Averaging as an

8 Edleson, M. E. 1988. "Value Averaging: A New Approach to Accumulation." American Association

By Hung-Cheng Lai; Tseng-Chan Tseng and Sz-Chi Huang

Reported by Author; Author; Author

© 2019 EBSCO Industries, Inc. All rights reserved.

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