The predictive ability and profitability of technical trading rules: evidence from the Asia-Pacific stock markets

Abstract

This study investigates whether the moving average and trading range breakout rules can outperform a simple buy-and-hold strategy to forecast stock price movements and earn excess returns after adjusting for transaction costs in twelve Asia-Pacific stock markets from January 1991 to December 2008.

The empirical results show that the trading rules have stronger predictive power in the emerging stock markets than in the developed stock markets. In addition, the short-term variants of the technical trading rules may be more useful in detecting the predictive ability of the technical trading rules. In examining the profitability of the technical trading rules, the study shows that transaction costs can eliminate the trading profits for most stock markets. The empirical results show that the technical trading rules are profitable in Thailand, Shenzhen, and Korea stock markets after adjusting for transaction costs. There is no evidence of the profitability of the technical trading rules in other stock markets after transaction costs. In order to investigate the relationship between market efficiency and the profitability of the technical trading rules, the study compares the excess returns between six developed stock markets and six emerging stock markets during the test period. The empirical results show that the technical trading rules performed better in the emerging stock markets than in the developed stock markets. This implies that the developed stock markets are efficient and using the technical trading rules may not be profitable.