November 24, 2014 - Technical Trading
In which country stock markets is technical analysis likely to work best? In the October 2014 version of her paper entitled “Technical Analysis: A Cross-Country Analysis”, Jiali Fang investigates three potential cross-country determinants of technical trading profitability:
- An individualism index, measuring the degree to which individuals integrate via cultural groups.
- Market development and integrity metrics, including stock market size, stock market age, transaction costs and measures of investor protection, anti-director rights, ownership concentration and insider trading.
- Information uncertainty metrics, including aggregate market turnover, volatility of cash flow growth rate and book-to-market ratio.
She considers 26 previously studied trading rules employing only past prices, classified as: variable moving average (VMA) rules, fixed-length moving average (FMA) rules and trading range break-out (TRB) rules. VMA rules are long (short) an index when a short-term moving average is above (below) a long-term moving average. FMA rules are similar to VMA rules, but hold a newly signaled position a fixed interval of 10 days. TRB rules generate buy (sell) signals when price rises above (falls below) the resistance (support) defined by prices over a specified past interval. Tests include both regressions and model strategies that are long (short) the market index as signaled and invest in the risk-free asset when there is no signal. Using cultural metrics, daily stock market index data and economic/financial variables for 50 countries during March 1994 through March 2014, she finds that: Keep Reading