Economic benefits of technical analysis in portfolio management: Evidence from global stock markets

• Author: Yuan‐Teng Hsu,Jying‐Nan Wang,Jiangze Du,Hung‐Chun Liu
• DOI: http://doi.org/10.1002/ijfe.1697
• Date: 01 April 2019
• Published date: 01 April 2019

Received: 26 January 2018 Revised: 16 August 2018 Accepted: 10 September 2018

DOI: 10.1002/ijfe.1697

RESEARCH ARTICLE

Economic benefits of technical analysis in portfolio

management: Evidence from global stock markets

Jying-Nan Wang1Hung-Chun Liu2Jiangze Du3Yuan-Teng Hsu4

1School of Economics and Management,

Chongqing University of Posts and

Telecommunications, Chongqing, China

2Department of Finance, Minghsin

University of Science and Technology,

Hsinchu, Taiwan

3School of Finance, Jiangxi University of

Finance and Economics, Nanchang, China

4Research Center of Finance, Shanghai

Business School, Shanghai, China

Correspondence

Yuan-Teng Hsu, Research Center of

Finance, Shanghai Business School,

Shanghai, China.

Email: yuanteng.hsu@gmail.com

JEL Classification: G11; G14; G15

Abstract

Producing good economic value in trading strategies for investorsbased on tech-

nical analysis is an issue of major interest in the academe and in practice. This

study considers 9,555 trading rules and examines the usability of technical analy-

sis. The double-or-out (DO) and the optimal-portfolio (OP) strategies are used to

investigate how investorsconstruct their ass et allocation. The sample for empir-

ical study is comprised of 20 major stock indexes from global markets as risky

assets from 1998 to 2013. The DO strategy on average produces higher terminal

wealth rather than does the buy-and-hold (BH) strategy, but the average utility

(AU) of the former is worse than the latter. Nevertheless, using the OP strat-

egy not only increases the terminal wealth of investors but also generates higher

utility. Given a starting investment of one dollar and considering the best 100

trading rules, the DO and OP strategies result in averageterminal wealth of 17.6

dollars and 5.9 dollars, respectively.In addition, in terms of AU, both of them are

better than the BH strategy.These pieces of evidence demonstrate that investors

who use an appropriate strategy of technical analysis in ass et allocation can pro-

duce good economic value, a finding that supports the continued use of technical

analysis in practice.

KEYWORDS

economic benefit, portfolio, technical analysis, trading strategy

1INTRODUCTION

Fama (1970) provides the efficient market hypothesis

(EMH), which proposes that asset prices always fully

reflect available information. Based on the EMH, any trad-

ing strategy produced from certain financial or economic

model cannot make additional economic profits, includ-

ing fundamental and technical analyses. However, several

empirical studies have challenged the EMH. For example,

a number of studies have been made of equity predictabil-

ity,such as the work of Rozeff (1984), Campbell and Shiller

(1988), Campbell and Shiller (1988), Fama and French

(1988), and Lo and MacKinlay (1988). Their empirical

results reveal that equity return is predictablewhen certain

fundamental factors are included in the analysis. Besides

considering fundamental factors, many investors often

predict stock prices based on technical analysis, which is a

method that applies past prices and other past statistics in

forecasting future price trends.

Technicalanalysis has been examined extensively in aca-

demic studies. Brock, Lakonishok, and LeBaron (1992)

verified the outperformance of simple technical trading

rules, a moving average oscillator, and a trading range

break-out, comparing the market to Dow Jones Industrial

Average (DJIA) from 1897 to 1986. Lo, Mamaysky, and

Wang (2000) found that technical analysis has a practical

890 © 2018 John Wiley & Sons, Ltd. wileyonlinelibrary.com/journal/ijfe IntJ Fin Econ. 2019;24:890–902.