The Impact of Technical Analysis on Stock Returns in an Emerging Capital Markets (ECM’s) Country: Theoretical and Empirical Study

Abstract

Technical analysis, even if deliberated by some as purely conjecture, is still generally acknowledged as additional information to main brokerage companies. There are existent two reasons for the achievement of technical analysis and why its success is still debated: (1) stock return predictability stems from efficient markets that can be analysed by time-varying equilibrium returns, and (2) stock return predictability forms from prices wandering apart from their fundamental valuations. Fundamentally, both explanations show some kind of overall market inefficiency where investors are capable of exploiting. Therefore, technical analysis derived its importance from its ability to train investors to take investment decision based on historical trends of securities prices. To help find answers to the issues raised and to structure the study, the following general research question is set: is it possible for technical analysis to achieve abnormal returns in an Emerging Capital Markets (ECM's) country, more specifically, the Egyptian Stock Exchange? If yes, hence it could be possibly used to help individual investors to take effective investment decision. By means of theoretical and empirical investigation, this study provides significant evidences that technical analysis achieved abnormal returns in inefficiency periods. This study suggests that simple trading rules, more specifically; the simple moving average beat the standard buy-and-hold strategy for the Egyptian stock exchange.

Performance Evaluation of Stock Markets

“…One of the most used is method for financial analysis -technical analysis that is based on the hypothesis that past price tends to repeat itself in the future (Gorgulho et al 2011). Technical analysis is a wide term that includes the usage of a range of trading strategies in global financial markets (Masry 2017). This method firstly was used by the Japanese rice dealers, which were selling futures contracts (called future), 300 years ago.…”

“…Investors who accept EMH try to form portfolios that optimally diversify risk or assimilate the market. However, investors who use technical analysis try to regularly beat the market via revealing inefficiencies in market structure (Masry 2017).…”

Pembentukan Portofolio Optimal Dengan Menggunakan Model Indeks Tunggal

“…tOleh tkarena titu informasi tyang ttidak tbenar tdan ttidak ttepat ttentunya takan tmenyesatkan tpara pemodal tdalam tmelakukan tinvestasi tpada tsekuritas, tsehingga tini takan merugikan tpara tpemodal. tSemakin ttepat tdan tcepat tinformasi tsampai tkepada calon tpemodal tdan tdicerminkan tpada tharga tsaham, tmaka tpasar tmodal tyang bersangkutan tsemakin tefisien t (Masry, 2017) Pasar tmodal tadalah tpertemuan tantara tpihak tyang tmemiliki tkelebihan dana tdengan tpihak tyang tmembutuhkan tdana tdengan tcara tmemperjualbelikan sekuritas t (Sanrego, 2017). tInvestortsebagaitpihak tyangtmemiliki tkelebihan dana tdapat tmenginvestasikan tdananya tpada tberbagai tsekuritas tdengan harapan memperoleh treturn tdi tpasar tmodal ttersebut.…”

The Impact of Unsystematic Risk on Stock Returns in an Emerging Capital Markets (ECM’s) Country: An Empirical Study

“…Yet, the discipline may be further enriched through studies using emerging markets data since one may expect differences between the microstructure effects of stock market trading in emerging economies and those in the industrial economies. As compared with developed stock markets, ECM tends to exhibit: higher serial correlation, less frequent trading, slower adjustment of prices to news, and indirect evidence of more insiders trading (Masry, 2017).…”

“…Masry (2016b) verified that the lack of the comprehensive and appropriate institutional setups that support financial markets in most emerging markets recommends that prices will be more predictable. Extending market microstructure research to focus on ECMs, as the study of Masry (2017), stated that ECM show distinctive features that support investors perform diversification within their portfolio. Standard statistical tests may not entirely reveal the possibility for abnormal return to be attained in developing markets because of some distinctive characteristics.…”