A Theory of Technical Trading Using Moving Averages

45 Pages Posted: 17 Sep 2013 Last revised: 23 Mar 2014

See all articles by Guofu Zhou

Guofu Zhou

Washington University in St. Louis - John M. Olin Business School

Yingzi Zhu

Tsinghua University - School of Economics & Management

Date Written: March 22, 2014

Abstract

In practice, traders, such as high-frequency and day traders, rely in part or primarily on moving averages to predict market directions, but their equilibrium impact is unknown. This paper presents a model to analyze how such technical traders compete trading with informed investors and how they affect the market risk premium. Our model can explain both the time series momentum, documented by Moskowitz, Ooi and Pedersen (2012), that market prices tend to be positively correlated in the short-run and negatively correlated in the long-run, and the trend factor, proposed by Han and Zhou (2013), that high abnormal returns can be earned on a portfolio using moving averages to capture trends of various time horizons.

Keywords: Technical analysis, trend-following, asymmetric information

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

Suggested Citation

Zhou, Guofu and Zhu, Yingzi, A Theory of Technical Trading Using Moving Averages (March 22, 2014). Available at SSRN: https://ssrn.com/abstract=2326650 or http://dx.doi.org/10.2139/ssrn.2326650

Guofu Zhou (Contact Author)

Washington University in St. Louis - John M. Olin Business School ( 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/

Yingzi Zhu

Tsinghua University - School of Economics & Management ( email )

Beijing, 100084
China
+86-10-62786041 (Phone)

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