Technical Analysis of Columbia Financial Market
Advocates of market efficiency generally believe that it is impossible for technical analysts to predict recurring-price pattern and technicians could not beat buy-and-hold strategy using technical trading rules. However, technical traders believe that there is some form of market efficiencies and technical traders can use price patterns strategy to beat buy-and-hold strategy.
Objective of this paper is to investigate Columbia Stock Market and attempt to find technical trading rules to predict changes in the Columbia Stock Market Index. The paper identifies trading strategy to be used to beat buy-and-hold strategy to enhance efficiency of Columbia stock market.
Within the past few decades, the stock markets in the emerging economies have experienced rapid growth, which have attracted investors across the globe. With the increase in the price movements in the emerging economies, greater importance has been given to market efficiency. While technical trading rules have been implemented to test market efficiencies in the emerging countries such as BRIC (Brazil, Russia, India and China), there is a paucity of research that confirms that technical trading rules could be applied in the Columbia stock market.
This study evaluates different technical trading rules on Columbia stock market and determines whether changes in the Columbia market index could be predicted using technical analysis. The remainder of the paper is structured as follows: Section II of the paper discusses literature review, while section III discusses the data and methodology, while section IV provides the empirical results on technical trading rules. Section V provides buy-and-hold strategy and section VI provides the conclusions.
II. Literature Review
Dominant theme in financial market since the last few decades is the concept of efficient market systems. Fama (1970) defines efficient market system as the market, which its security price always reflects available information and any new information simultaneously and quickly reflect in prices. Moreover, news of any company always unpredictably arrive randomly leading to price changes unpredictably or follow a random walk. According to Fama perspectives, there are three forms of EMH (Efficient Market Hypothesis):
a) the weak form,
b) the semi-strong form, and c) the strong form.
Supporters of the weak-form market efficiency show that investors will not be able to drive up profits above buy -- and hold strategy using trading rules, which depend solely on past market information such as volume or price, and the implying technical trading, will be useless.
More than three decades of research shows that financial economists, academic researchers and practitioners have not yet reached a consensus whether technical trading rules could yield profitable trading results. However, overwhelming number of economists and financial analysts support the "weak-form" efficient market hypothesis. While the earlier research strongly supported the random walk hypothesis, however, the semi-strong form of Efficient Market Hypothesis has been the basis of most empirical research.
Early results from the literatures reveal that profitability derived from the technical trading was overwhelmingly negative. For example, Fama and Blume (1966), Alexander (1964), Larson (1960), Granger and Morgenstern (1963), Van Horn and Parker (1967), Jensen and Benington (1970), Mandelbrot (1963), Fama (1965), and Osborne (1962) all supported the weak form of market efficiency.
Since the beginning of the1990s, financial analysts have used technical trading rules to evaluate financial market performances. In 1990s, technical trading rules have enjoyed a renaissance in both academic circles and Wall Street. Several papers deliver evidences that simple predicting trading rules are very effective in predicting stock returns. Contrary to fundamentalists who use balance sheet or income statements of a company to predict stock returns, technical analysis is based on the assumption that past volume, prices and many other indicators could be used to detect future price movements. The art of technical analysis is to identify changes in prices and maintain investment postures using the trade signals. (Pring, 1991).
Murphy (1999) points out that technical analysis is the study of market actions such as volume and price to forecast future price actions. To test power of technical trading rules, stock technicians use the WFEMH (Weak-Form Efficient Market Hypotheses) using past returns to determine random walk testing. Following the test, technicians use various trading rules to predict profits using buy-and-hold strategy.
While many studies have investigated whether technical rules could be used to provide a superior investing performance, however, the most comprehensive recent study of Brock, Lakonishok, and LeBaron (1992) (BLL) using 90 years of daily stock prices discovered 26 technical rules that had...
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