An analysis of trading strategies in eleven European stock markets

Abstract In recent years, the validity of the weak form efficient market hypothesis (EMH) has been called into question as several studies have uncovered evidence that technical trading rules have predictive ability with respect to both developed and emerging stock market indices. This study analyses the forecasting power of 2 of the most popular trading rules using index data for a selection of 11 European stock markets over the January 1991 to December 2000 period. The findings indicate that the emerging markets included in this paper are informationally inefficient; these markets displayed some degree of predictability in their share returns, although the developed markets did not. Furthermore, the results point to large differences in the performance of the rules examined; while small size filters consistently outperformed the buy-and-hold strategy in the emerging markets examined even after the consideration of transaction costs, the performance of the moving average rules was erratic and varied dramatically from market to market.

[1]  Ricardo Pereira Câmara Leal,et al.  Tests of technical trading strategies in the emerging equity markets of Latin America and Asia , 1999 .

[2]  E. Elton.  Modern portfolio theory and investment analysis , 1981 .

[3]  B. LeBaron,et al.  Simple Technical Trading Rules and the Stochastic Properties of Stock Returns , 1992 .

[4]  R. Sweeney,et al.  Evidence on short–term trading strategies , 1990 .

[5]  Kalok Chan,et al.  The profitability of technical trading rules in the Asian stock markets , 1995 .

[6]  M. M. Dryden.  A Statistical Study of U.K. Share Prices , 1970 .

[7]  Robert A. Levy,et al.  RELATIVE STRENGTH AS A CRITERION FOR INVESTMENT SELECTION , 1967 .

[8]  Kalok Chan,et al.  Market Efficiency and the Returns to Technical Analysis , 1998 .

[9]  Ian Domowitz,et al.  Liquidity, Volatility and Equity Trading Costs Across Countries and Over Time , 2001 .

[10]  Kwong-C. Cheung,et al.  Trading rules and stock returns: some preliminary short run evidence from the Hang Seng 1985-1997 , 2000 .

[11]  R. Sweeney,et al.  Some New Filter Rule Tests: Methods and Results , 1988, Journal of Financial and Quantitative Analysis.

[12]  Franco Parisi,et al.  Simple technical trading rules of stock returns: evidence from 1987 to 1998 in Chile , 2000 .

[13]  E. Fama.  EFFICIENT CAPITAL MARKETS: A REVIEW OF THEORY AND EMPIRICAL WORK* , 1970 .

[14]  E. Fama,et al.  Filter Rules and Stock-Market Trading , 1966 .

[15]  Robert Hudson,et al.  A note on the weak form efficiency of capital markets: The application of simple technical trading rules to UK stock prices - 1935 to 1994 , 1996 .

[16]  F. E. James.  Monthly Moving Averages—An Effective Investment Tool? , 1968, Journal of Financial and Quantitative Analysis.

[17]  J. V. Horne,et al.  The Random-Walk Theory: An Empirical Test , 1967 .

[18]  The trading performance of filter rules on the Taiwan Stock Exchange , 1995 .

[19]  Martin J. Gruber,et al.  MODERN PORTFOLIO THEORY , 2003 .

[20]  S Sidney,et al.  ALEXANDER, . Price Movements in Speculative Markets: Trends or Random Review, , . , 1961 .

[21]  The performance of filter rules on the Jamaican Stock Exchange , 1998 .

[22]  David Power,et al.  The profitability of moving average trading rules in South Asian stock markets , 2001 .

[23]  Robert A. Levy,et al.  Random Walks: Reality or Myth , 1967 .