Academic journal article Academy of Accounting and Financial Studies Journal

The Application of Variable Moving Averages in the Asian Stock Markets

Academic journal article Academy of Accounting and Financial Studies Journal

The Application of Variable Moving Averages in the Asian Stock Markets

Article excerpt

ABSTRACT

This paper examines the predictive ability and its returns from the application of variable moving averages rules (VMA) in seven selected Asian equity markets, namely Malaysia, Singapore, Hong Kong, Taiwan, Japan, Korea and China. The seven popular daily Asian market indices from January 1988 to December 2002 were studied with ten variations in length. The results indicated support for variable moving averages in particular for the shorter lengths with twentyday as the most profitable among all. Interestingly, the mean returns of buy and sell signals from the VMA applications in the all seven markets enjoyed greater return against the unconditional buy-and-hold mean returns. The returns of the seven Asian market indices found to be statistically significant with the Japan stock market reported the least forecasting ability. Shanghai Composite Index with 0.1545% daily mean returns appeared to be the most attractive.

INTRODUCTION

There has always been much excitement about the use of the technical strategies as an investment approach. Both Wong, Manzur, and Chews (2003) and Tian, Wan, and Guo (2002) in their respective studies have provided strong support on the profitability of technical strategies. The significant growth and increased attractiveness of Asian market capitalisation has stimulated considerable interests among global investors. Can investors consistently apply the technical strategies such as moving averages to generate substantial profits? It is also interesting to investigate the use of technical strategies in various Asian stock markets in out-of-the-sample period with different length of technical indicators as compared to earlier studies. This paper, therefore, focuses on the investigation of the variable moving averages in seven popular Asian stock markets from January 1988 to December 2002. The findings of the study contribute to an expanded understanding of the predictive ability of technical strategies for the investment management. Section 3 describes the data and methodology while the analysis and discussion are presented in section 4. The section 5 presents the conclusion of the study.

LITERATURE REVIEW

The study of Brock, Lakonishok and LeBaron (1992) which examined the variable moving average rules (VMA) and fixed moving averages using the daily Dow Jones Industrial Average (DJIA) over the period of 90 years from 1897 to 1986, was a substantial finding which led to the re-emergence of technical analysis. The results provided strong support for the predictive ability of technical trading rules, and the suggestion that technical analysis had no value might have been premature. Based on the VMA rule, the annualised average return on buy signal days was 10.7% while the return on sell signal days was -6.1%. The difference of 16.8% was a significant finding, as an efficient market would expect the difference in the returns to be approximately equal to zero. The study however, did not take into consideration the trading cost, which were later examined by Bessembinder and Chan (1998). Nevertheless, the effort by Brock et al. (1992) was a significant contribution to the framework of technical trading rules for subsequent studies.

Hudson, Dempsey and Keasey (1996) replicated the technical trading rules of Brock et al. (1992) on the daily Financial Times Industrial Ordinary Index (FT30) from July 1934 to January 1994. Their results showed that the technical trading rules did have predictive ability in terms of UK market. However, the excess returns of 0.8% from the application of these rules were not attractive after taking into account of 1% per round trip transaction costs.

Bessembinder and Chan (1995) examined the same trading rules of Brock et al. (1992) on six Asian countries (i.e. Hong Kong, Japan, Korea, Malaysia, Thailand and Taiwan) using their daily stock market indices over the period of 1975 to 1991. The results indicated strong forecast ability for the emerging markets of Malaysia, Thailand and Taiwan even in the presence of the trading costs. …

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