Do the Profits from Technical Trading Rules Reflect Inefficiencies?

Posted: 10 Oct 1998

Abstract

We investigate whether the demonstrated effectiveness of technical analysis for forecasting equity returns can be reconciled with market efficiency. We find that evidence supportive of technical sell signals identifying periods of negative expected returns is confined to the pre-1940 subsamples. On average, transactions costs eliminate any additional returns to traders using the technical rules. We also demonstrate that technical analysis of an index constructed from CRSP returns, which is not typically observed by practicing technicians, is as useful for forecasting returns as is technical analysis of the widely observed DJIA. Finally, we show that, while technical analysis of individual equity price histories can forecast returns, it does not provide the ability to "beat the market". On balance, we conclude that there is little or no reason to view the evidence of technical forecast power as inconsistent with market efficiency.

JEL Classification: D84

Suggested Citation

Bessembinder, Hendrik (Hank) and Chan, Kalok, Do the Profits from Technical Trading Rules Reflect Inefficiencies?. Available at SSRN: https://ssrn.com/abstract=6374

Hendrik (Hank) Bessembinder (Contact Author)

Arizona State University ( email )

PO Box 873906
Tempe, AZ 85207
United States

Kalok Chan

CUHK Business School ( email )

Hong Kong
852 3943 9988 (Phone)

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