Is Technical Analysis Invalid? An Empirical Study Based on Taiwan And China Stock Market Weekly Data
Date Issued
2014
Date
2014
Author(s)
Tung, Chung-Hsiang
Abstract
Both long only and long/short strategy with reference of technical indicators with weekly data inputs generate excess returns comparing to buy-and-hold strategy. This would be considered as evidence that 1) technical indicators are helpful in enhancing investment returns, 2) Taiwan and China stock markets is not a Weak Form Efficient Market and 3) the use of daily transaction data in academic essays is inappropriate.
Summary:
In the past few decades, a number of empirical studies support the Weak Form Efficient Market Hypothesis and tend to conclude that technical analysis is useless. However, based on my multiyear observation of the stock markets, I have interesting findings which go against the academic conclusion. Particularly, about 70% of the Master and PhD degree essays in the Taiwan University Library which cover technical analysis in their studies use daily market data inputs while this is very different from the fact that in practice institutional investors use weekly market data as inputs for technical analysis. I try to use weekly data to verify the effectiveness of the most commonly used technical indicators (RSI, KD, MACD and MA). My study covers eight main equity indexes of Taiwan and China markets as below:
1、TWSE Index and OTC Index
2、Shanghai Composite Index and Shanghai A Share Index and Shanghai B Share Index
3、Shenzhen Composite Index and A share Index and B share Index)
My empirical study includes two types of investment strategies, namely long only and long/short strategy, to exam whether these technical indicators will enhance investment returns, based on weekly transaction data. If these indicators do add value to generate returns, then this study could be considered as evidence that the use of daily data in the academic essays is inappropriate. Meanwhile, my study tries to rank which indicators (RSI, KD, MACD and MA) are more efficient in enhancing returns (in terms of return per transaction). Hopefully the study will be a good reference for further research of the academy and investors in the future. Below please find the conclusions.
1、Both long only and long/short strategy with adoption of technical indicators with weekly data inputs generate excess returns comparing to buy-and-hold strategy.
The results suggest that technical indicators are valid in generating returns and Taiwan stock market is not a Weak Form Efficient Market.
2、The accurate ratios of these technical indicators are: MA 100％,RSI 87.5％,MACD 81.25％,KD 68.75％.
3、The investment returns by adoption of technical indicators:
Only long only strategy: MA 235.51％,RSI 152.46％,MACD 124.2％,KD 113.03％.
long/short strategy: MA 370.29％,MACD 254.38％,RSI 235.41％,KD 156.9％.
4、The frequency of the transactions and rates of investment return derived from the technical indicators:
I)、long only strategy
MACD: 11 times of transaction with return rate of 124.20%
MA: 17 times of transaction with return rate of 235.51%
KD: 29 times of transaction with return rate of 113.03%
RSI: 32 times of transaction with return rate of 152.46%
II)、long/short strategy
MACD: 11 times of transaction with return rate of 254.38%
MA: 16 times of transaction with return rate of 370.29%
KD: 28 times of transaction with return rate of 156.90%
RSI: 31 times of transaction with return rate of 235.41%
5、In terms of added-value of these four indicators, the ranking is MA, MACD, RSI, KD. For Shenzhen markets, all indicators with exception of KD add values to long only strategy. All these four indicators add values to long only and long/short strategies for all Shanghai and Taiwan Indexes. This would be considered as evidence that Taiwan and China equity markets are not Weak Form Efficient Markets. As the study is based on weekly market data and the results show that all these four indicators are valid to gnenerate returns, the study suggests that it''s not appropriate to uses daily data as the input for academic study.
6、MA is 100% valid in generating excess returns for both long only and long/short strategies for all eight indexes covered by the study.
Subjects
技術分析
效率市場
技術指標
移動平均線
Type
thesis
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