Even in Emerging Markets, Technical Trading is Hazardous to Your Wealth

ABSTRACT

This paper tests for the ability of a variety of technical indicators to generate excess returns at the individual stock level in the seven emerging and frontier markets of the Gulf region. While technical indicators show some early profitability promise, after controlling for the data snooping bias using the False Discovery Rate (FDR) methodology and non-synchronous trading, we fail to find any predictive ability or profitability for technical analysis. We arrive at a similar finding when assessing the risk-adjusted performance of a portfolio composed of stocks chosen based on technical indicators. The findings go to show the failure of technical analysis on the stock level. The findings are also evidence of the Gulf region markets being at least weak-form efficient and carry implications for investors choice of investment tools.

KEYWORDS:

• Emerging markets
• technical analysis
• trading rules
• GCC
• transaction costs
• market efficiency
• FDR

JEL:

• C32
• C52
• G11
• G12
• G14
• G15

Supplementary material

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

Notes

1. Refer to Park and Irwin (2007) and Nazário et al. (2017) for literature reviews on technical analysis.

2. FTSE to upgrade Kuwait to emerging market in two stages. March 29, 2018. https://www.reuters.com/article/kuwait-stocks-ftse/ftse-to-upgrade-kuwait-to-emerging-market-in-two-stages-idUSL8N1RA7H9.

3. Saudi Arabia Wins Coveted Emerging-Market Status in MSCI Upgrade. June 20, 2018. https://www.bloomberg.com/news/articles/2018-06-20/saudi-arabia-wins-coveted-emerging-market-status-in-msci-upgrade.

4. Qatar, UAE upgraded to emerging market status on sixth attempt. June 12, 2013. https://dohanews.co/qatar-uae-upgraded-to-emerging-market-status-on-sixth/.

5. This would not be a departure from the actual practice given the dominance of Islamic investing, many investors would abstain from receiving interest on their cash balances or their trading accounts do not offer interest on the cash by default.

6. We have taken a cutoff of 80% for % of t significant as a measure of consistent profitability across stocks.

7. Please refer to the Appendix for further discussion on the methodology.

8. We assume zero risk-free interest rate as in Section 4.

9. Please refer to the Supplementary Material available online for summary statistics on the SMB and HML factors across the seven GCC markets.

10. The results can be found in Table S2 in the Supplementary Material online.

11. The results can be found in Tables S3 and S4 in the Supplementary Material online.

12. The results can be found in Tables S5 and S6 in the Supplementary Material online.