Abstract
This study investigates how stock price synchronicity, as a measure of how stock prices reflect market-wide information relative to firm-specific information, explains the profitability of moving-average (MA) technical trading. The stocks of firms with less synchronicity have more information uncertainty (IU) (i.e., they reflect less firm-specific information), which amplifies investors’ underreaction bias and the price momentum effect, and are therefore more profitable. Testing a sample of stocks listed on the Taiwan and the Taipei stock exchanges over July 1997-June 2021, we provide evidence consistent with the synchronicity-related IU hypothesis. For a low-synchronicity stock price quintile portfolio, the abnormal returns of an MA strategy relative to a buy-and-hold strategy as estimated by the Fama-French 5-factor model are high at 18.05% per annum and even higher for a high-synchronicity stock price quintile portfolio (9.22% per annum). The MA strategy for low-synchronicity stock price portfolio remains more effective even when considering equally and value-weighted portfolios, testing various sub-periods, considering alternative MA lag lengths and controlling for market variables such as liquidity, sentiment, economic policy uncertainty, and economic cycle.
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