Forecasting Security Returns With Simple Moving Averages

This study examines the ability of simple moving averages to forecast security returns. Five moving average variants are used to develop a forecasting model using OLS regression for the DJIA, NASDAQ, TSX and CAD-US exchange rate. The forecasting model is compared to the random-walk model without a drift and tested out-of-sample. The results suggest that the moving averages have no predictive ability on the four indices at a 1 day lag. However, the moving averages explain approximately 45% to 48% of the variation in the returns in the following 10 days and clearly outperform the random-walk model. Most of the forecasting ability is derived from the MA (5, 150). Hurst Statistic estimation is used to confirm the long-term dependencies in the lag 10 data set

The Profitability Of Technical Trading Rules: A Combined Signal Approach

The focus of this paper is to determine the profitability of technical trading rules by evaluating their ability to outperform the naïve buy-and-hold trading strategy. Moving average cross-over rules, filter rules, Bollinger Bands, and trading range break-out rules are tested on the S&P/TSX 300 Index, the Dow Jones Industrial Average Index, NASDAQ Composite Index, and the Canada/U.S. spot exchange rate. After accounting for transaction costs, excess returns are generated by the moving average cross-over rules and trading range break-out rules for the S&P/TSX 300 Index, NASDAQ Composite Index and the Canada/U.S. spot exchange rate. Filter rules also earn excess returns when applied on the Canada/U.S. spot exchange rate. The bootstrap methodology is used to determine the statistical significance of the results. The profitability of the technical trading rules is further enhanced with a combined signal approach

A Combined Signal Approach To Technical Analysis On The S&P 500

This paper examines the effectiveness of nine technical trading rules on the S&P 500 from January 1950 to March 2008 (14,646 daily observations).  The annualized returns from each trading rule are compared to a naïve buy-and-hold strategy to determine profitability. Over the 59 year period, only the moving-average cross-over (1,200) and (5,150) trading rules were able to outperform the buy-and-hold trading strategy after adjusting for transaction costs. However, excess returns were generated by employing a Combined Signal Approach (CSA) on the individual trading rules. Statistical significance was confirmed through bootstrap simulations and robustness through sub-period analysis.&nbsp

A survey of short selling in Canada

This chapter provides insights into the regulatory framework that governs short sales and the taxation of short sales in Canada, and discusses recent trends in short selling activity in Canada. In Canada, the Investment Industry Regulatory Organization of Canada (IIROC) governs most of the activity related to equity short sales through the Universal Market Integrity Rules (UMIR). A proposal was put forward in 2007 to repeal the uptick rule in Canada altogether, however, the market turbulence of 2008 led the IIROC to defer the proposed removal of the uptick rule. Although not part of the IIROC's UMIR, some short selling activity is also prohibited by certain insiders by the Canada Business Corporations Act (CBCA). There are, however, some exceptions to this prohibition that allow insiders to sell short under certain conditions if they own another security convertible into the security sold or an option or right to acquire the security sold. A short sale becomes taxable when the borrowed shares are repurchased and returned to the original owner. Short sales typically have volumes lower than that of the opposing long position in a given security. Short sale volume consisted of 78% of the average trade volume for the TSX and 83% for the TSXV. The lowest level of short sale volume relative to long positions was seen on the CNSX, with an average rate of 52%. UMIR requirements make it necessary to periodically report the short position held in each security on an account-by-account basis. This requirement allows for an analysis of the rates of turnover of short positions and the percentage of securities on a given marketplace that a short position has been undertaken in

Ex ante expectations and ex post assessment of the nature and extent of earnings management in the MBE setting

There are two main objectives of this research. First, this research investigates whether the relationship between the extent of earnings management and the abnormal return of firms that meet or beat earnings expectations (MBE) is moderated by the nature of the earnings management (opportunistic or informative). Second, this research investigates whether a belief revision process exists regarding the pricing of discretionary accruals. Specifically, this research examines whether the abnormal return is a function of the markets’ ex ante expectation of the extent of earnings management at the earnings announcement date, and ex post assessment of the extent assessment of earnings management during the financial statement analysis period. In relation to the first objective, the results reveal that the extent of earnings management has a negative (positive) relationship with the abnormal return when earnings management is likely opportunistic (informative). The discount (reward) to meeting or beating expectations is more significant when earnings management is more clearly opportunistic (informative). In addition, the market is shown to penalize firms more for the use of opportunistic earnings management than it rewards firms for the use of informative earnings management. In relation to the second objective, the results reveal that the abnormal return is a function of the prior quarter discretionary accruals at the earnings announcement date and the current quarter discretionary accruals during the financial statement analysis period. Taken together, these results support a belief revision process occurring from the earnings announcement date to the financial statement analysis period as equity valuations change from being a function of prior quarter discretionary accruals to current quarter discretionary accruals. This is consistent with past literature that suggests that investors require time to price earnings management into the abnormal return (Balsam, Bartov & Marquardt 2002; DeFond & Park 2001; Gavious 2007). This research makes several contributions to the literature. Unlike past studies, this research does not assume that all firms that meet or beat expectations by one cent employ an opportunistic earnings management strategy. Rather, this research contributes to literature by testing whether the market differentiates between opportunistic and informative earnings management when awarding an abnormal return to firms that MBE. A second contribution is in relation to the research design. This is the first known study to use an interaction variable to capture the non-linear relationship between the nature and extent of earnings management and the abnormal return. Utilizing a variable for the nature of earnings management, and examining the non-linear relationship between the nature and extent of earnings management contributes to the literature by offering a more robust test of the market pricing mechanism of earnings management. A third contribution is the introduction of gross margin into the MBE setting. Anecdotal evidence clearly indicates that gross margin is a key metric; however, academic literature has yet to corroborate this assertion. These results suggest that gross margin is a key metric that is relied upon by the market when determining an abnormal return for firms that MBE. The fourth contribution, which is of significance to practice, is the introduction of a composite model that provides insight into whether a firm’s earnings management is likely to be opportunistic or informative. This model has potential applications for investors as a tool to make investment decisions and avoid inefficient allocations of capital. The fifth contribution is the insight regarding the timing by which discretionary accruals are reflected in equity valuations. The impact of the extent of earnings management is shown to be revised from the earnings announcement date to the financial statement analysis period

S&P 500 Index Price Spillovers around the COVID-19 Market Meltdown

This paper explores price spillover effects around the COVID-19 pandemic market meltdown between the S&P 500 index, five other financial markets, and the VIX. Frequency domain causalities are estimated for the January–May 2020 time period on a high-frequency data set at five-minute intervals. The results reveal that price movements in the S&P 500 generally caused price movements in other financial markets before the market meltdown; however, a large number of bi-directional causalities emerged during the market meltdown. During the market recovery, S&P 500 price movements were more likely to be caused by other financial markets’ price movements. The VIX, exchange rate, and gold returns had the most prominent influence on the S&P 500 returns in the market recovery

Combined signal approach: evidence from the Asian-Pacific equity markets

This article tests the profitability of the Combined Signal Approach (CSA) (Lento and Gradojevic, 2007) in the Asian-Pacific equity markets. The CSA is based on the premise that the consensus agreement of profitable trading signals should outperform any single signal. The results present further evidence that the CSA improves the profitability of individual trading rules and consistently earns profits in excess of the buy-and-hold trading strategy. The significance of the results is tested through a bootstrap simulation.

The Profitability of Technical Analysis during the COVID-19 Market Meltdown

This article explores the profitability of technical trading rules around the COVID-19 pandemic market meltdown for the S&P 500 index, Bitcoin, Comex gold spot, crude oil WTI, and the VIX. Trading rule profits are estimated from January to May 2020, including three sub-periods, on a high-frequency data set. The results reveal that the trading rules can beat the buy-and-hold trading strategy. However, only the Bollinger Bands and trading range break-out rules become profitable after transaction costs during the market crash. Moreover, it is found that composite trading signals effectively improve the profitability of technical analysis around the COVID-19 market crash

Multiscale analysis of foreign exchange order flows and technical trading profitability

International audienceThis paper investigates the multiscale (frequency-dependent) relationship between technical trading profitability and feedback trading effects in the Canada/U.S. dollar foreign exchange market. The results suggest that technical trading activities of financial customers drive frequent violations of the FX market microstructure assumption that exchange rate movements are driven by order flow. After controlling for transaction costs, we find that the contribution of financial customers in feedback trading dominates the contribution of non-financial customers, especially at lower frequencies. An additional, novel contribution is that technical indicators constructed from order flows can be profitable