The Technical Trading Strategies Based On Asymmetric Of Stock Return

One of the greatest gulfs between modern capital theory and financial practice is the separation that exists between Efficient Market Hypothesis (EMH) and Technical Analysis. Based on a survey of the early and recent empirical literatures on testing the efficiency of Technical Analysis, the author finds that although most early studies denied the usefulness of Technical Analysis in stock markets, a number of recent studies since1990s indicated that Technical Analysis could generate profits. Technical analysis is in the attention of the academia and widely used in practice areas, which has become a fact that could not be avoid in the modern capital market theory. But in theory, there were few study could explain why technical analysis has value in certain conditions, the use of traditional technical analysis was the lack of theoretical basis. Currently, from data to model, there is few research could find the real role of technical analysis in practice, but technical analysis has been used widely by the majority of investors. Based on this situation, this article regards Shanghai stock market as the research object, and main study the relation between an asymmetric property of Shanghai composite index returns and profitability of technical trading strategies, in order to provide theoretical and empirical support the feasibility of technical trading strategies.First, this article formulates the meaning of asymmetric in stock returns sequences, and defines two patterns to study the asymmetry of the Shanghai index yield sequence. Second, in order to capture the asymmetry, this paper uses the asymmetric nonlinear autoregressive model, and then identifies the relation between the asymmetry and the technical trading strategies based on the research of this model. Last, we make a empirical research on the asymmetric property and profitability of technical trading strategies, and also a out-of-sample test.The findings are following as:First, Daily returns exhibit a strong asymmetric pattern with positive returns persisting longer than negative returns. Second, the unconditional mean of returns implied from the asymmetric nonlinear autoregressive models is positive under a prior positive return and negative under a prior negative return under the two patterns. Third, the empirical research show that most trading strategies are designed by the asymmetrical could generate positive, significant and stable returns for the spreads between buy signals and sell signals. Fourth, the results of the out-of-sample test on two sub samples are same to the conclusion of the overall sample. Finally this paper also finds that as the increase of the holding period in the technical trading strategies, the abnormal excess return rate presents a gradual downward trend.On the whole, this paper studies the relation between an asymmetric property of Shanghai composite index returns and profitability of technical trading strategies, and finds the observed Asymmetry in return series is the main source of profitability for the implied strategies, which could provide theoretical and empirical support for the feasibility of technical trading strategies, there by corroborating arguments for the Chinese A-share market does not achieve the weak effective capital market.