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http://dx.doi.org/10.29214/damis.2018.37.1.003

An Empirical Study of the Trading Rules on the basis of Market Anomalies and Technical Analysis  

Ohk, Ki-Yool (Department of Business Administration, Pusan National University)
Lee, Min-Kyu (Institute of Management Research, Pusan National University)
Publication Information
Management & Information Systems Review / v.37, no.1, 2018 , pp. 41-53 More about this Journal
Abstract
This study validates the trading rules based market anomalies and technical analysis in the Korean stock market. For the analysis, we built decile portfolios on the basis of corporate characteristics factors that clearly demonstrate specific patterns of stock returns including the firm size, book-to-market equity, and accruals. This portfolio was used to develop a portfolio based on the moving average trading strategy which was used for popular technical analysis tools, and then that was evaluated using the Sharpe ratio. We also created a zero-cost portfolio to identify the profitability and success rate of the moving average trading strategy. We lastly sought to ensure a more robust evaluation by calculating the Sortino ratio of the portfolio based on the moving average trading strategy with various lags. Key findings from this validation are as follows. First, a smaller firm size, a higher book-to-market equity, and lower accruals led to larger average returns. Second, the risk-adjusted performance of the moving average trading strategy was the highest in terms of the firm size, followed by book-to-market equity and accruals. Third, the returns of the zero-cost portfolios all had a positive value, with its overall success rate hovering over 68.8%, demonstrating the successfulness of the moving average trading strategy. Fourth, various evaluations revealed the economic usefulness of our trading strategy that used market anomalies and technical analysis.
Keywords
Market anomaly; Technical analysis; Trading rule; Sharpe ratio; Sortino ratio;
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