Moving Average as a Psychological Barrier: Evidence from International Markets

58 Pages Posted: 20 Jun 2023

See all articles by Yuanpeng Li

Yuanpeng Li

Fudan University

Yan Luo

Fudan University - School of Management

Zhiguo Xiao

Fudan University - School of Management

Abstract

We show that the moving averages (MAs) of stock market indices act as psychological barriers. We reveal that market indices do not move continuously near their MAs, especially in markets dominated by unsophisticated investors. Using international data, we find that a stock market index’s MA exerts a significant impact on future index returns when it is crossed over, and the effect is distinct from both the 52-week high effect of George and Hwang (2004) and the historical high effect of Li and Yu (2012). The MA effect is stronger when investors’ sophistication is lower or when their anchoring propensity is higher. A trading strategy formulated based on the MA effect generates an average abnormal annual return of 1.69% to 4.26% in international markets.

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 as a Psychological Barrier: Evidence from International Markets. Available at SSRN: https://ssrn.com/abstract=4486459 or http://dx.doi.org/10.2139/ssrn.4486459

Yuanpeng Li

Fudan University ( email )

Yan Luo (Contact Author)

Fudan University - School of Management ( email )

No. 670, Guoshun Road
No.670 Guoshun Road
Shanghai, 200433
China

Zhiguo Xiao

Fudan University - School of Management ( email )

670 Guoshun Road
Shanghai, 200433
China

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