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Sentiment and the Effectiveness of Technical Analysis: Evidence from the Hedge Fund Industry

47 Pages Posted: 22 Jun 2014 Last revised: 5 Feb 2017

David M. Smith

State University of New York at Albany - School of Business

Na Wang

Hofstra University - Frank G. Zarb School of Business

Ying Wang

State University of New York at Albany - School of Business

Edward J. Zychowicz

Hofstra University - Department of Finance

Date Written: January 30, 2015

Abstract

This paper presents a unique test of the effectiveness of technical analysis in different sentiment environments by focusing on its usage by perhaps the most sophisticated and astute investors, namely hedge fund managers. We document that during high-sentiment periods, hedge funds using technical analysis exhibit higher performance, lower risk, and superior market-timing ability than non-users. The advantages of using technical analysis disappear or even reverse in low-sentiment periods. Our findings are consistent with the view that technical analysis is relatively more useful in high-sentiment periods with larger mispricing, which cannot be fully exploited by arbitrage activities due to short-sale impediments.

Keywords: Investor sentiment, technical analysis, hedge funds, fund performance, risk, timing ability

JEL Classification: G12, G14, G23

Suggested Citation

Smith, David M. and Wang, Na and Wang, Ying and Zychowicz, Edward J., Sentiment and the Effectiveness of Technical Analysis: Evidence from the Hedge Fund Industry (January 30, 2015). Journal of Financial and Quantitative Analysis (JFQA), Vol. 51, No. 6, December 2016, pp. 1991-2013. Available at SSRN: https://ssrn.com/abstract=2457289 or http://dx.doi.org/10.2139/ssrn.2457289

David McNeil Smith

State University of New York at Albany - School of Business ( email )

1400 Washington Ave.
Albany, NY 12222
United States

HOME PAGE: http://www.albany.edu/ciim

Na Wang (Contact Author)

Hofstra University - Frank G. Zarb School of Business ( email )

134 Hofstra University
Hempstead, NY 11549
United States

Ying Wang

State University of New York at Albany - School of Business ( email )

1400 Washington Ave.
Albany, NY 12222
United States

Edward J. Zychowicz

Hofstra University - Department of Finance ( email )

Hempstead, NY 11550
United States

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