Profits on technical trading rules and time-varying expected returns: evidence from Pacific-Basin equity markets

Abstract

This study evaluates the profitability of technical trading rules in Pacific-Basin equity markets by using equilibrium asset pricing models with time-varying expected returns. Specifically, this study uses asset pricing models under complete integration, mild segmentation [Errunza, V., Losq, E., Padmanablan, P., 1985. International asset pricing under mild segmentation hypothesis. Journal of Banking and Finance, 16, 949–972.], and complete segmentation in assessing trading rule profits. The same set of technical rules that Brock et al. [Brock, W., Lakonishok, J., LeBaron, B., 1992. Simple technical trading rules and the stochastic properties of stock returns, Journal of Finance, 47, 1731–1764.] examine are applied to the Japanese, U.S., Canadian, Indonesian, Mexican and Taiwanese equity indices. The results from the standard tests indicate that the technical rules have significant forecast power for all countries, except for the U.S. However, the results from the bootstrap tests indicate that some equilibrium asset pricing models (mainly, the asset pricing model under mild segmentation) are consistent with the observed trading rule returns for Japan, the U.S., the recent period of Canada and Taiwan. The overall results indicate that taking into account the time-varying expected returns is important to evaluate the profitability of the technical trading rules.