Profitability of the Moving Averages Technical Trading Rules in an Emerging Stock Market: A Study of Stocks Listed in Pakistan Stock Exchange

Abstract

This study examines the profitability of Moving Averages (MA) timing strategy over the buy and hold strategy for individual stocks listed at Pakistan Stock Exchange (PSX). We applied Han, Yang, and Zhou (2013), methodology to individual stock returns and found inconclusive evidence of MA timing strategy’s predictive ability to earn higher returns over buy and hold strategy. We also report market risk-adjusted returns to remove any market movement effects and apply alternative moving averages lag lengths to check the robustness of our results. We observe individual stock returns are noisier than portfolio returns and the simple technical trading rule of moving average lack the ability to predict individual stock returns. We propose the use of more complex trading rules in future studies to ascertain the profitability of technical trading rules in individual stocks.