Technical trading strategies and cross-national information linkage: the case of Taiwan stock market

Abstract

This study tests four prevalent moving average technical trading rules for Taiwan stock markets. More notably, cross-national information from the US stock markets is also incorporated in our technical trading rules to project Taiwan stock market movements. We then design trading strategies and investigate their predictive power over buy-and-hold strategy. Our results suggest that technical trading rules are predictive for Taiwan stock markets. Applying the information reflected in the US stock markets to project Taiwan stock market movements is comparable to using Taiwan stock market information in isolation because these two markets are strongly correlated. Finally our results indicate that Leverage/Money strategy helps investors to beat buy-and-hold strategy.

Acknowledgements

The authors are especially grateful to the Editor's useful comments. This paper also has been benefited from the comments made by the seminar participants at the Conference of National Science Council for New Faculty and PhDs in Finance held by National Science Council, Taiwan, 2003.

Notes

¹ EMH states that news events arrive randomly and price movements should follow a random walk fashion. Profit-maximizing investors, thus, will always take new information into account immediately.

² See Larson (1960), Osborne (1962), Alexander (1964), Granger and Morgenstern (1963), Mandelbrot (1963), and Fama and Blume (1966).

³ See Brock et al. (1992).

⁴ If MA (short, long) is used, it represents an unconditional range. Range can also be defined as a band of percentage for that short MA across long MA.

⁵ BLL (1992) provide rationalization for this by suggesting that the negative returns on sell days are probably caused by either the changes in expected returns or market inefficiency.

⁶ CMA (1, 50) represents CMA (1, 50, 0), CMA (1, 50, 1), and CMA (1, 50, 2).