Technical Analysis Around The World

Electronic copy available at: http://ssrn.com/abstract=1181367

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Technical Analysis Around the World

Ben R. Marshall*, Rochester H. Cahan, Jared M. CahanMassey University New Zealand

Abstract

Technical analysis is not consistently profitable in the 49 countries that comprise the MorganStanley Capital Index once data snooping bias is accounted for. There is some evidence thattechnical trading rules perform better in emerging markets than developed markets, which isconsistent with the finding of previous studies that these markets are less efficient, but thisresult is not strong. While we cannot rule out the possibility that technical analysiscompliments other market timing techniques or that trading rules we do not test are profitable,we do show that over 5,000 trading rules do not add value beyond what may be expected bychance when used in isolation.JEL Classification: G12, G14Keywords: Technical Analysis, Quantitative, Market TimingFirst Version: March 2008This Version: October 2009*Corresponding author. Department of Economics and Finance, College of Business, MasseyUniversity, Private Bag 11222, Palmerston North, New Zealand. Tel: +64 6 350 5799; Fax:+64 6 350 5651; E-Mail:

B.Marshall@massey.ac.nz

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Electronic copy available at: http://ssrn.com/abstract=1181367

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Technical Analysis Around the World

Abstract

Technical analysis is not consistently profitable in the 49 countries that comprise the MorganStanley Capital Index once data snooping bias is accounted for. There is some evidence thattechnical trading rules perform better in emerging markets than developed markets, which isconsistent with the finding of previous studies that these markets are less efficient, but thisresult is not strong. While we cannot rule out the possibility that technical analysiscompliments other market timing techniques or that trading rules we do not test are profitable,we do show that over 5,000 trading rules do not add value beyond what may be expected bychance when used in isolation.JEL Classification: G12, G14Keywords: Technical Analysis, Quantitative, Market TimingFirst Version: March 2008This Version: October 2009

Electronic copy available at: http://ssrn.com/abstract=1181367

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I. Introduction

Technical analysis, which involves making investment decisions based on past pricemovements, continues to prove very popular with the investment community.

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Technicaltrading rules are closely related to momentum trading strategies, which involve buying(selling) winner (loser) stocks. Most academic authors find that momentum is an enduringanomaly which has led to Fama and French (2008, p. 1653) describing it as “pervasive.”These two factors have resulted in a large amount of research energy being devoted toinvestigating whether technical trading rules are profitable. Most empirical studies find thattechnical analysis does not add value in the US equity market, but several authors (e.g.Bessembinder and Chan, 1995; Ito, 1999) have presented supportive evidence in emergingmarkets. More recently, Zhu and Zhou (2009) develop a theoretical model that shows thatmoving average rules can add value to other asset allocation rules.We add to the literature by investigating the profitability of technical trading rules inthe 49 developed and emerging markets that make up the Morgan Stanley Capital Index(MSCI). In doing so, we make several contributions. Firstly, we consider in excess of 5,000trading rules from four different rule families on each market.

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Most previous studies consider

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See Taylor and Allen (1992), Lui and Mole (1988), and Cheung and Chinn (2001) for surveys of investment professionals which illustrate the importance they ascribe to technical analysis.

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We follow the majority of authors and study “mechanical” technical trading rules. Jegadeesh (2000) and Taylor (2003) find pattern based rules, such as those studies by Lo, Mamaysky, and Wang (2000) and Dawson andSteeley (2003) are not profitable leading Taylor (2003) to suggest that future research should focus onmechanical rules, as we do in this study.