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Technical Analysis, Market Efficiency, And Behavioral Finance

Posted on:2015-08-13Degree:DoctorType:Dissertation
Country:ChinaCandidate:T D WangFull Text:PDF
GTID:1109330464455376Subject:Business management
Abstract/Summary:PDF Full Text Request
Technical Analysis (TA hereafter) is a classic tool for investment decision-making, which has a long history and has been popular among the investor community for decades. However, due to the lack of theoretical support, the subjectivity of its methods and the contradiction with the famous Efficient Market Hypothesis, TA has caused considerable controversy among academics. To explain the abnormal phenomenon between the theory and the practice, this dissertation adopts the methods of both theoretical model and empirical study.The author establishes three models to explain why investors use technical analysis:Information Discovery model suggests that TA can infer non-public substantial information about fundamentals; Trend Chasing model captures an trend chasing behavior of irrational investors, by which they gain higher profit with higher risk; Herding effect model argues that the same buying or selling behavior of many technical traders may, by themselves, push the price to move towards the direction that favor their forecasts.The empirical results based on Chinese stock market during 2000-2012 show that Dual Moving-average Crossover and Trading Range Break generates robust economic profit, with annualized excess return up to 5.18% and 2.85% respectively. But Relative Strength Index, Alexander filter rule, price patterns and candlestick rules fails to generate excess return, after deducting transaction cost.The FGLS regressions based on 898 listed firms show that firms with higher degree of information asymmetry, lower proportion of technical traders and lower degree of investor sentiment experience higher excess return, which supports the prediction of information discovery model but contradicts the prediction of trend chasing model and herding behavior model. These result implies that TA is probably a method of information discovery when the market is temporarily inefficient.
Keywords/Search Tags:technical analysis, market efficiency, behavioral finance, information asymmetry, herding effect
PDF Full Text Request
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