The Profitability of Moving Average Rules: Smaller Is Better in the Brazilian Stock Market

ABSTRACT

This study analyzes the effectiveness of using certain moving average rules in the most important emerging market of Latin America: Brazil. Using different MSCI indices, we find that the best performance is provided by the MSCI Brazil Small Cap Index, which tracks the small cap segment of the Brazilian stock market, as opposed to the MSCI Brazil Index which measures the performance of large and medium firms and has been the main reference for the Brazilian stock market in previous empirical evidence. Additionally, we report clear evidence of the existence of a size effect in the Brazilian stock market due to the superior performance of the index which tracks the smaller companies over those which track larger companies. These results restate the importance of in-depth knowledge of stock market patterns in order to develop correct trading strategies in each case.

KEY WORDS:

• Brazil
• data snooping bias
• moving average rules
• profitability
• size effect

JEL CLASSIFICATION:

• G10
• G11
• G14.

Supplemental Material

Supplemental data for this article can be accessed on the publisher’s website.

Notes

1 These values were obtained from the factsheets of each index published in February, 2017, on the MSCI website (https://www.msci.com).

2 See http://www.bmfbovespa.com.br/pt_br/como-investir/como-investir-em-acoes/#panel11a.

3 http://www.bmfbovespa.com.br/en_us/nonresident-investor/characteristics-brazilian-market/taxation.htm.

4 http://www.bmfbovespa.com.br/en_us/services/fee-schedules.

⁵ Hereafter, in order to save space, only the results including transaction costs are shown. Remaining results available on request.

Additional information

Funding

This article has been financially supported by the Junta de Extremadura under the V Action Plan for Research and Development 2014/17 through the GIMAF research group (reference GR15027); Junta de Extremadura [V Action Plan for Research and Development 2014/17].