Efficient market hypothesis: a ruinous implication for Portugese stock market
- PDF / 370,689 Bytes
- 15 Pages / 439.37 x 666.142 pts Page_size
- 78 Downloads / 207 Views
Efficient market hypothesis: a ruinous implication for Portugese stock market Farhang Niroomand 1
& Massoud
Metghalchi 1 & Massomeh Hajilee 1
# Academy of Economics and Finance 2020
Abstract The advocates of the efficient market hypothesis recommend buying the market index for the long run, the implication for the Portuguese investors are to buy the PSI-20 index and hold it for at least 15 years. In this paper, we compare two other strategies for PSI-20 over the period 1999 to 2020. The first strategy is based on moving average trading rules and the second strategy, Gold Momentum Strategy (GMS), is based on switching between gold and PSI-20 based on semi-annual performance. Our findings suggest that the moving average trading rules beat the buy and hold strategy by more than 10% per year over the entire period and each sub-period considering both risk and transaction costs. For the second strategy, GMS which is based on comparing the performance of the PSI-20 and the gold index on semi-annual basis and go with the best of two for the next 6 months, we find similar results as the moving average trading rules. Keywords Efficient market . Trading rules . Momentum strategy . Moving average JEL classification G1 . G12 . G14
* Farhang Niroomand [email protected] Massoud Metghalchi [email protected] Massomeh Hajilee [email protected]
1
School of Business Administration, University of Houston-Victoria, 3007 N. Ben Wilson, Victoria, TX 77901, USA
Journal of Economics and Finance
1 Introduction Academicians in general and finance professors in particular believe in the Efficient Market Hypothesis (EMH) that asserts stock prices already reflect all information such as the history of past prices or trading volume. Therefore, the weak-form market efficiency hypothesizes that investors may not drive profits above a buyand-hold strategy using any technical trading rule that depends on price and/or volume; implying that technical trading rules are useless. Advocates of EMH argue that the best strategy would be to buy the market index and keep it for the long term, or the famous buy and hold strategy (BH). In this paper, we will advocate two strategies for Portuguese investors that are superior to the BH strategy recommended by the EMH. The first strategy is based on Technical Analysis (TA), and the second is based on Gold Momentum Strategy (GMS) which is based on switching between the index and gold. Technical analysis is based on the idea that prices move in trends; according to Pring (1991, p. 3) TA is an art “to identify a trend reversal at a relatively early stage and ride on that trend until the weight of evidence shows or proves that the trend has reversed.” One of the most important indicators for trend identification is the moving average indicator. Our first strategy is based on some variations of moving average trend following techniques. Many technicians believe TA can help save an investor from extreme losses in the event of a severe bear market like the 2008 housing crisis or the 2020 Covid-19 crisis. For
Data Loading...
