The predictive ability of technical trading rules: an empirical analysis of developed and emerging equity markets

Kevin Rink ()
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Kevin Rink: Goethe University Frankfurt

Financial Markets and Portfolio Management, 2023, vol. 37, issue 4, No 3, 403-456

Abstract: Abstract We investigate the predictability of leading equity indices of 23 developed and 18 emerging markets with a set of 6406 technical trading rules over up to 66 years. Using a state-of-the-art test for superior predictive ability to control for data snooping bias, we find in-sample evidence for technical heuristics with significant outperformance over a simple buy-and-hold strategy in the majority of markets. The proportion of heuristics with superior performance is much higher among emerging market indices, and the predictability diminishes drastically over time in all markets. In particular, markets turn unpredictable in the last years of our sample. Moreover, the results are very sensitive to the introduction of moderate transaction costs. An out-of-sample analysis shows that the performance of technical rules is not persistent in the sense that recently best-performing rules perform significantly worse than simple buy-and-hold strategies in the future. Overall, our results cast serious doubt on whether investors could have earned any excess profits using the broad range of considered technical trading rules.

Keywords: Technical analysis; Predictive ability; Multiple hypothesis testing; Data snooping bias; Market efficiency; Transaction costs (search for similar items in EconPapers)
JEL-codes: C12 C15 G11 G14 G15 (search for similar items in EconPapers)
Date: 2023
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DOI: 10.1007/s11408-023-00433-2

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