Abstract
Literature reveals that many investors rely on technical trading rules when making investment decisions. If stock markets are efficient, one cannot achieve superior results by using these trading rules. However, if market inefficiencies are present, profitable opportunities may arise. The aim of this study is to investigate the effectiveness of technical trading rules in 34 emerging stock markets. The performance of the rules is evaluated by utilizing White’s (2000) Reality Check and the Superior Predictive Ability test of Hansen (2005), along with an adjustment for transaction costs. These tests are able to evaluate whether the best model performs better than a buy-and-hold benchmark. Further, they provide an answer to data snooping problems, which is essential to obtain unbiased outcomes. Based on our results we conclude that technical trading rules are not able to outperform a naive buy-and-hold benchmark on a consistent basis. However, we do find significant trading rule profits in 4 of the 34 investigated markets. We also present evidence that technical analysis is more profitable in crisis situations. Nevertheless, this result is relatively weak.
Highlights
ONE of the most discussed topics in financial literature is the efficiency of speculative markets
By interpreting the nominal p-values, before transaction costs, we can state that before accounting for data snooping, the performance of technical trading rules is strongly significant in all stock markets, except for Brazil and Latvia
When looking at the difference between the consistent superior predictive ability (SPA) p-value and nominal p-value, we find that data snooping has a huge influence on the performance of the best trading rule
Summary
ONE of the most discussed topics in financial literature is the efficiency of speculative markets. The efficiency of markets is considered to be a dynamic process. This means that profitable technical trading opportunities may occur from time to time. Recent literature (e.g., McKenzie [2], Marshall, Cahan and Cahan [3]) shows that inefficiencies may occur in emerging stock markets, which is in favor of technical analysis. We use these insights to investigate whether 34 worldwide emerging stock markets provide a basis for technical trading rules
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