A comparative study of technical trading strategies and return predictability: an extension of using NYSE and NASDAQ indices |
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| Affiliation: | 1. American Express, New York, NY, USA;2. Lehigh University, 621 Taylor St., Bethlehem, PA 18015, USA;1. Department of Diagnostic Radiology, The University of Texas MD Anderson Cancer Center, 1400 Pressler Street Unit 1473, Houston, TX 77030, USA;2. Department of Diagnostic and Intervention Radiology, Cairo University, Kasr Al-Ainy Street, Cairo 11652, Egypt;1. Department of Physics, Jadavpur University, Kolkata 700 032, India;2. West Bengal State University, Kolkata, India;3. Indian Institute of Engineering Science and Technology, Shibpur, India;1. Clausthal University of Technology, Department for Engineering Ceramics, Germany;2. Federal Institute for Materials Research and Testing (BAM), Germany;3. University of Babylon, Department for Construction Materials and Ceramics Engineering, Iraq |
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| Abstract: | This study extends the work of Brock et al.’s (1992) empirical analysis on technical trading rules (price and momentum) by including trading volume moving averages; broader indices (New York Stock Exchange (NYSE) and National Association of Security Dealers Automatic Quotations (NASDAQ)) covering both large-cap and small-cap firms using market weightings; and focusing on a time period that includes great innovations in trading and disseminating data to the market. Similar to their study, we base our conclusions on nonparametric analysis. By extending the t-test analysis through a residual bootstrap methodology utilizing a random walk, a generalized autoregressive conditional heteroskedasticity in mean (GARCH-M), and a GARCH-M with instrument variables, criticisms of earlier technical analysis are mitigated. Overall, the results support Brock et al.’s (1992) price-weighted index (Dow Jones Industrial Average (DJIA)) analysis by showing that the technical trading rules add value by capturing profit opportunities when compared to a buy-and-hold strategy. When the analysis of the trading rules are applied to different time periods, the results reveal a weakening in profit potential over time. This may imply that the market is becoming more efficient in disseminating information to a wider range of investors. |
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