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A New Anomaly: The Cross-Sectional Profitability of Technical Analysis

Published online by Cambridge University Press:  06 December 2013

Yufeng Han ,
Ke Yang  and
Guofu Zhou
Yufeng Han
Affiliation:
yufeng.han@ucdenver.edu, Business School, University of Colorado Denver, PO Box 173364, Denver, CO 80217
Ke Yang
Affiliation:
kyang@rgare.com, Reinsurance Group of America, 1370 Timberlake Manor Pkwy, Chesterfield, MO 63017
Guofu Zhou
Affiliation:
zhou@wustl.edu, Olin School of Business, Washington University, 1 Brookings Dr, St. Louis, MO 63130, China Academy of Finance Research (CAFR), and China Economics and Management Academy (CEMA).
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Abstract

In this paper, we document that an application of a moving average timing strategy of technical analysis to portfolios sorted by volatility generates investment timing portfolios that substantially outperform the buy-and-hold strategy. For high-volatility portfolios, the abnormal returns, relative to the capital asset pricing model (CAPM) and the Fama-French 3-factor models, are of great economic significance, and are greater than those from the well-known momentum strategy. Moreover, they cannot be explained by market timing ability, investor sentiment, default, and liquidity risks. Similar results also hold if the portfolios are sorted based on other proxies of information uncertainty.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 48 , Issue 5 , October 2013 , pp. 1433 - 1461
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2013 

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