Technical Trading Rules in Emerging Stock Markets

50 Pages Posted: 5 Feb 2012

See all articles by Dries Heyman

Dries Heyman

Ghent University - Department of Financial Economics

Koen Inghelbrecht

Ghent University - Department of Economics

Stefaan Pauwels

Ghent University - Department of Financial Economics

Date Written: February 2, 2012

Abstract

Literature reveals that many investors rely on technical trading rules when making investment decisions. If stock markets are efficient, one cannot achieve superior results by using these trading rules. However, if market inefficiencies are present, profitable opportunities may arise. The aim of this study is to investigate the effectiveness of technical trading rules in 34 emerging stock markets. The performance of the rules is evaluated by utilizing White’s (2000) Reality Check and the Superior Predictive Ability test of Hansen (2005), along with an adjustment for transaction costs. These tests are able to evaluate whether the best model performs better than a buy-and-hold benchmark. Further, they provide an answer to data snooping problems, which is essential to obtain unbiased outcomes. Based on our results we conclude that technical trading rules are not able to outperform a naïve buy-and-hold benchmark on a consistent basis. However, we do find significant trading rule profits in 4 of the 34 investigated markets. We also present evidence that technical analysis is more profitable in crisis situations. Nevertheless, this result is relatively weak.

Keywords: technical trading rules, reality check, superior predictive ability, emerging stock markets, data snooping

Suggested Citation

Heyman, Dries and Inghelbrecht, Koen and Pauwels, Stefaan, Technical Trading Rules in Emerging Stock Markets (February 2, 2012). Available at SSRN: https://ssrn.com/abstract=1998036 or http://dx.doi.org/10.2139/ssrn.1998036

Dries Heyman

Ghent University - Department of Financial Economics ( email )

Ghent, 9000
Belgium
0032 (0)9 2645307 (Phone)
(0)9 2643577 (Fax)

Koen Inghelbrecht

Ghent University - Department of Economics ( email )

Sint-Pietersplein 5
Ghent, B-9000
Belgium
+32 9 264 89 77 (Phone)

HOME PAGE: http://users.ugent.be/~kjinghel/

Stefaan Pauwels (Contact Author)

Ghent University - Department of Financial Economics ( email )

Ghent, 9000
Belgium

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