Skewness preference and the popularity of technical analysis

Sebastian Ebert and Christian Hilpert

Journal of Banking & Finance, 2019, vol. 109, issue C

Abstract: We propose a simple model of how investors evaluate a trading rule, and show that the market timing of technical trading rules induces lottery-like trading profits. Therefore, investors’ preference for positive skewness caters to the popularity of technical analysis. Since prospect theory implies strong skewness preference, it can explain why investors trade extensively on chart patterns that are meaningless in light of the efficient market hypothesis. Technicians often invoke behavioral finance as its theoretical foundation. Contrary to this view, we show that ideas from behavioral finance explain why technical analysis is popular despite the lack of theoretical foundation and empirical success.

Keywords: Behavioral economics; Moving average; Prospect theory; Skewness preference; Technical analysis (search for similar items in EconPapers)
JEL-codes: D8 G1 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:109:y:2019:i:c:s0378426619302493

DOI: 10.1016/j.jbankfin.2019.105675

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