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Intertemporal profitability and the stability of technical analysis: evidences from the Hong Kong stock exchange

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Abstract:

This study investigates the impact of market integration on the profitability of two simple and popular technical trading rules, the Simple Moving Average (SMA) and the Trading Range Break (TRB) in Hong Kong. Using data from 1972 to 2006, we find that the SMA (1, 50) consistently outperforms the market before the integration of stock exchanges in 1986. Under the (1, 50) rule, a variable length moving average performs better than the fixed length moving average rule by 2.5 to 5% (annual) before transaction costs because it includes the information of the first 9 days into investors' decision. The results are robust to the out of sample tests for the validity of the profitability of the trading rules. The returns of the trading range break rules are insignificant over the 35-year span. Our results support the conjecture that stock market integration may lead to better information efficiency. The findings of significant pre-1986 profits and insignificant post-1986 profits, contradict previous findings that returns are predictable in Hong Kong, suggesting that the Hong Kong stock market may be weak-form efficient after 1986. Overall, our results suggest that technical analysis matters for asset pricing.

Document Type: Research Article

DOI: https://doi.org/10.1080/00036840902817805

Affiliations: 1: Faculty of Business Administration, Department of Finance and Business Economics, University of Macau, Macau, China 2: Faculty of Business Administration, Department of Accounting and Information Management, University of Macau, Macau, China

Publication date: 2011-06-01

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