Profitability of the CRISMA System: From World Indices to the Hong Kong Stock Market

Wai-Yan Cheng (), Yan Leung Cheung and Haynes H. M. Yung

Asia-Pacific Financial Markets, 2003, vol. 10, issue 1, 45-57

Abstract: Many studies show that the use of technical analysis can generate excess returns. We test the "CRISMA" technical trading rule introduced by [Pruitt and White J. Portfolio Managt. Spring, 1988, 55--58] on global equity indices and common stocks in Hong Kong. Out study shows that no excess returns could be found in indices except those in Asia. This validates the claims that the Asian stock markets are not as efficient as other stock markets and hence can be exploited by technical analysis. How does CRISMA perform on common stocks in Hong Kong? Generally speaking, CRISMA does not fair better than the buy and hold strategy. Further analysis reveals excess returns for stocks with very large turnover. This is consistent with other recent research on CRISMA conducted on US and UK stock markets. We also amend part of the original CRISMA rules to yield better performance: shrinking the moving average window sizes can increase both the number of trade signals and the excess returns. Therefore CRISMA can be made to work with some judicious choice of parameters, depending on the turnover.

Date: 2003
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