Market Efficiency And Profitability Of Technical Analysis

After the global financial crisis in 2008 and China's crash events in June, 2015, Chinese investors become cautious of the risk in stock market. The risk problem also reflects the effectiveness of this market. Although crash event happened more than half a year ago, A-shares have become the most painful memories for the Chinese investors this summer. After the A-shares erased 45%of China's stock market's value, capitals flew out quickly, and the drop of foreign exchange reserves broke records. It is not only A-shares plunged, but also other stock markets around the world, like the ones in Europe and Japan. U.S. stocks, though far from a crash, but was pushed to an adjustment, which was the first time after the bull market more than four years ago. Although the Chinese government has adopted a series of rescue measures, but could not prevent the market value from decreasing, which further induced numbers of investors to sell stocks and caused a vicious circle.Under this background, the Chinese people raised a lot of questions on their stock market investment strategies. And the final doubt is whether the stock market is really effective or not, which determines whether the investment strategy is really at work or not. These questions have become hot topics among the financial fields, the researchers and the investors. In China's stock market, most are private investors with strong speculative motivation. They are trying to get excess returns through their own investment strategies, which is the dream of almost every investor. Among Chinese shareholders' investment strategies, the fundamental analysis and technical analysis are mostly used. Along with the development of shareholders'investment knowledge and the enhancement of their professional ability, more and more investors pay attention to technical analysis strategies. And what they most commonly used in technical analysis is average strategy- they use the average of the stock market trends to predict the future trend of the stock prices, longing for excess profits.So far, a large number of researchers uses a variety of models and methods to research the effectiveness of Chinese stock market. Some scholars tested the effectiveness of Shanghai stock market and Shenzhen stock markets separately. Others directly analyzed the weak effectiveness. According to these research results, there are two views about the effectiveness of China's stock market. The first one is that the Chinese stock market has not yet reached the weak state of effectiveness. The second one is that the Chinese stock market is of weak effectiveness, but not of the half strong state. The common result is that the Chinese stock market is not mature, not the strong type of effective market. Therefore, stock prices cannot fully reflect all the current information, and investors can take advantage of certain messages and investment strategies. Some researchers analyzed the effectiveness of the investment strategies, including using moving averages to construct investment strategies and analyzing China's stock market information with graphics. And some inspected significant excess returns with variable length moving average strategies via historical data. Some used random-walk models, ARMA models -- as well as the Bootstrap test of GARCH-M models for yields of the line trading strategies, and obtained the absolute value of the "normal" yield, but they cannot explain the yields gained by the moving average strategies.In the field of theory, the validity of market and the role of technical analysis draw attention of numbers of researchers. Many scholars have studied on the validity of the market and the test of technical analysis, but seldom used GRS test. So this paper will focus on the profitability of the mean strategy with GRS inspection on the basis of the CAPM model.This paper will combine the theory and empirical study. After the literatures, MATLAB econometric software was used for the empirical analysis. It is of science and reality.This paper consists of five chapters. The first chapter is introduction, including the background and the meaning of the selected topic, as well as the innovation of the research. The second part is about related theories and literature reviews. The theoretical part introduced the relevant knowledge of economics and econometrics, so that readers can understand and reference. The literature review introduces related research methods at home and abroad and also summarizes the results and explains their economic sense.The third chapter is about the design of the research. This part mainly introduces the models, data sources and data processing methods. This paper applied the capital asset pricing model (CAPM) and GRS inspection, with average strategy to analyze the market validity and the profitability from technical analysis. In this paper, the data are from sharp (RESSER) financial database and CSMAR database. The first step is to use the asset pricing model to regress all the day yield data of A shares and the csi 300 data from 2000 to 2015 to estimate the parameter value and calculate the mean yield of all the A shares and the variance of vector. Process the data every six months from 2000 to 2015 with GRS inspection, and get the J value, which can measure the effectiveness of the market. So the J values divided the market into three types of market with different effectiveness. Finally, it uses the average strategy of technical analysis and J values for empirical testing.The fourth chapter is on empirical research to explain the specific empirical process. The fifth chapter is the empirical conclusion of this paper.The conclusion of this paper is that if the J value is greater, the market is less effective and the technology strategy is more useful. There are three innovations in this paper. First of all, this paper combines the CAPM and GPS to test the validity of the market and the profitability, which was not used by former researchers. Secondly, mean value strategy was used to research the profitability of technological analysis. Thirdly, the data of all A-share is form 1,20001 to 12,2015, which is the latest of the existing data, making the results of the comparison of value for reference.But there are also two fallbacks in this paper. The first one is that many earlier researchers have studied the market effectiveness, so this is not a creative research angle, but with a lot of attention from researchers in recent years. The second one is that the frequency of the data is six month, which means there are only 32 samples and this amount may influence the empirical results.There are a lot of directions for further researches, market validity issues and technical analysis has always been the hot topic of the stock market. Technical analysis includes many methods, for example, all kinds of index analysis. Later research can use a variety of models to research how indexes presented differently in market of different effectiveness.