Market efficiency and the returns to simple technical trading rules: New evidence from U.S. Equity Market and Chinese Equity Markets

Gary Gang Tian*, H. U A Guang Wan, G. U O Mingyuan

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

31 Citations (Scopus)

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 U.S. markets and also compare the excess returns between U.S. market and Chinese markets. Our results found that there is no evidence at all supporting technical forecast power by these trading rules in U.S. equity index after 1975. During the 1990s break-even costs turned to be negative, -0.06%, even failing to beat a buyholding strategy in U.S. equity market. In comparison, our results provide support for the technical strategies even in the presence of trading cost in Chinese stock markets.

Original languageEnglish
Pages (from-to)241-258
Number of pages18
JournalAsia-Pacific Financial Markets
Volume9
Issue number3-4
Publication statusPublished - 2002
Externally publishedYes

Keywords

  • Equity markets
  • Return forecastality
  • Technical analysis
  • Transaction costs

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