Market Efficiency and Returns to Simple Technical Trading Rules: New Evidence from U.S. Equity Market and Chinese Equity Markets

Asia-Pacific Financial Markets, Forthcoming

23 Pages Posted: 16 Sep 2014

See all articles by Gary Gang Tian

Gary Gang Tian

Macquarie University - Department of Applied Finance and Actuarial Studies; Macquarie University, Macquarie Business School

Guanghua Wan

Asian Development Bank Institute

Mingyuan Guo

Independent

Date Written: September 14, 2014

Abstract

Numerous studies in the finance literature have investigated technical analysis to determine its validity as an investment tool. This study is an attempt to explore whether some forms of technical analysis can predict stock price movement and make excess profits based on certain trading rules in markets with different efficiency level. To avoid using arbitrarily selected 26 trading rules as did by Brock, Lakonishok and LeBaron (1992) and later by Bessembinder and Chan (1998), this paper examines predictive power and profitability of simple trading rules by expanding their universe of 26 rules to 412 rules. In order to find out the relationship between market efficiency and excess return by applying trading rules, we examine excess return over periods in US markets and also compare the excess returns between US market and Chinese markets. Our results found that there is no evidence at all supporting technical forecast power by these trading rules in US equity index after 1975. During the 1990's break-even costs turned to be negative, -0.06%, even failing to beat a buy-holding strategy in US equity market. In comparison, our results provide support for the technical strategies even in the presence of trading cost in Chinese stock markets.

Keywords: Technical trading rules, market efficiency, US market, Chinese market

JEL Classification: G14

Suggested Citation

Tian, Gary Gang and Wan, Guanghua and Guo, Mingyuan, Market Efficiency and Returns to Simple Technical Trading Rules: New Evidence from U.S. Equity Market and Chinese Equity Markets (September 14, 2014). Asia-Pacific Financial Markets, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2496167 or http://dx.doi.org/10.2139/ssrn.2496167

Gary Gang Tian (Contact Author)

Macquarie University - Department of Applied Finance and Actuarial Studies ( email )

Room 513, Building E4A
North Ryde, NSW, 2109
Australia

Macquarie University, Macquarie Business School ( email )

New South Wales 2109
Australia

Guanghua Wan

Asian Development Bank Institute ( email )

6 ADB Avenue, Mandaluyong City 1550
Metro Manila
Philippines

Mingyuan Guo

Independent ( email )

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