Technical Indicators and Cross-Sectional Expected Returns

Abstract

This study shows that 14 widely documented technical indicators explain cross-sectional stock expected returns. The technical indicators have lower estimation errors than the three factor Fama-French model and the historical mean. The long-short portfolios based on the cross-sectional estimated returns generate substantial profits consistently across the entire period. The well-known cross-sectional expected return determinants, including momentum, size, book-to-market, investment, and profitability, do not explain the explanatory power of the technical indicators. Our findings suggest that the technical indicators play an important role in determining the variation in cross-sectional expected returns in addition to the five-factor model.

Keywords: Cross-sectional stock returns, technical indicators, three factor Fama-French model, cross-sectional expected return determinants

JEL Classification: C13, C31, G12