Moving Average's Role as a Psychological Barrier: Evidence from International Stock Markets

60 Pages Posted: 23 Dec 2022

See all articles by Yuanpeng Li

Yuanpeng Li

Fudan University

Yan Luo

Fudan University

Zhiguo Xiao

Fudan University - School of Management

Abstract

We show that the moving averages (MAs) of stock market indices act as psychological barriers and affect investors' trading. Market indices do not move continuously near their MAs, especially in markets dominated by unsophisticated investors. Utilizing international markets data, we show that the MA of a stock market index exerts significant impact on future index returns when it is crossed over, and the MA effect is distinct from both the 52-week high and historical high effects. The MA effect is especially evident when investor sophistication is low or anchoring propensity is strong, and could be used to formulate trading strategies.

Keywords: Psychological barriers, Anchoring bias, Moving average, Technical trading rules, International stock markets

Suggested Citation

Li, Yuanpeng and Luo, Yan and Xiao, Zhiguo, Moving Average's Role as a Psychological Barrier: Evidence from International Stock Markets. Available at SSRN: https://ssrn.com/abstract=4310592 or http://dx.doi.org/10.2139/ssrn.4310592

Yuanpeng Li

Fudan University ( email )

Yan Luo (Contact Author)

Fudan University ( email )

Beijing West District Baiyun Load 10th
Shanghai, 100045
China

Zhiguo Xiao

Fudan University - School of Management ( email )

670 Guoshun Road
Shanghai, 200433
China

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