Cross-Country Differences in Profitability from Technical Analysis Strategies

Abstract

We investigate five factors which may explain why technical analysis can be profitable in some markets but not others: 1) herding behaviour of investors, 2) information uncertainty, 3) sentiment, 4) non-linear (or chaotic) data generating processes, and 5) market development and institutional quality. Our cross-country evidence from 50 countries shows that technical analysis works well in countries that score highly on different proxies for these factors with the exception of proxies for sentiment. Our results also explain why studies using data from different countries find mixed results, and more broadly our results help explain how these factors influence market efficiency.

Keywords: technical analysis, market efficiency, herding, information uncertainty, sentiment, chaos.