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A New Anomaly: The Cross-Sectional Profitability of Technical Analysis

42 Pages Posted: 12 Aug 2010 Last revised: 22 May 2012

Yufeng Han

University of North Carolina (UNC) at Charlotte - Finance

Ke Yang

Washington University in St. Louis

Guofu Zhou

Washington University in St. Louis - Olin School of Business; CAFR (China Academy for Financial Research)

Date Written: August 27, 2011

Abstract

In this paper, we document that an application of a moving average strategy of technical analysis to portfolios sorted by volatility generates investment timing portfolios that often outperform the buy-and-hold strategy substantially. For high volatility portfolios, the abnormal returns, relative to the CAPM and the Fama-French three-factor models, are high, and higher than those from the well known momentum strategy. The abnormal returns remain high even after accounting for transaction costs. Although both the moving average and the momentum strategies are trend-following methods, their performances are surprisingly uncorrelated and behave differently over the business cycles, default and liquidity risk.

Keywords: Technical Analysis, Moving Average, Anomaly, Market Timing

JEL Classification: G11, G12, G14, C11, C61

Suggested Citation

Han, Yufeng and Yang, Ke and Zhou, Guofu, A New Anomaly: The Cross-Sectional Profitability of Technical Analysis (August 27, 2011). Available at SSRN: https://ssrn.com/abstract=1656460 or http://dx.doi.org/10.2139/ssrn.1656460

Yufeng Han

University of North Carolina (UNC) at Charlotte - Finance ( email )

9201 University City Boulevard
Charlotte, NC 28223
United States

Ke Yang

Washington University in St. Louis ( email )

One Brookings Drive
Saint Louis, MO 63130-4899
United States

Guofu Zhou (Contact Author)

CAFR (China Academy for Financial Research)

Shanghai Advanced Institute of Finance
Shanghai P.R.China, 200030
China

Washington University in St. Louis - Olin School of Business ( email )

Washington University
Campus Box 1133
St. Louis, MO 63130-4899
United States
314-935-6384 (Phone)
314-658-6359 (Fax)

HOME PAGE: http://apps.olin.wustl.edu/faculty/zhou/

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