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The Efficiency of Financial Markets Part II: A Stochastic Oscillator Approach
Umeå University, Faculty of Social Sciences, Umeå School of Business and Economics (USBE), Business Administration.
2019 (English)Independent thesis Advanced level (degree of Master (One Year)), 10 credits / 15 HE creditsStudent thesis
Abstract [en]

Over a long period of time, researchers have investigated the efficiency of financial markets. The widely accepted theory of the subject is the Efficient Market Hypothesis, which states that prices of financial assets are set efficiently. A common way to test this hypothesis is to analyze the returns generated by technical trading rules which uses historical prices in an attempt to predict future price development. This is also what this study aims to do. Using adjusted daily closing prices ranging over 2007 to 2019 for 5120 stocks listed on the U.S stock market, this study tests a momentum trading strategy called the stochastic oscillator in an attempt to beat a buy and hold strategy of the Russel 3000 stock market index. The stochastic oscillator is constructed in three different ways, the Fast%K, the Fast%D and the Slow%D, the difference being that a smoothing parameter is used in the Fast%D and Slow%D in an attempt to reduce the number of whiplashes or false trading signals. The mean returns of the technical trading strategies are tested against the mean returns of the buy and hold strategy using a non-parametric bootstrap methodology and also, the risk adjusted returns in terms of Sharpe Ratios are compared for the different strategies. The results find no significance difference between the mean returns of the buy and hold strategy and any of the technical trading strategies. Further, the buy and hold strategy delivers a higher risk adjusted return compared to the technical trading strategies, although, only by a small margin. Regarding the smoothing parameter applied to the strategies, it seems to fulfill its purpose by reducing the number of trades and slightly increasing the mean returns of the technical trading strategies. Finally, for deeper insight in the subject, a reading of "The efficiency of financial markets: A dual momentum trading strategy on the Swedish stock market" by Netzén Örn (2018) is recommended.

Place, publisher, year, edition, pages
2019. , p. 48
Keywords [en]
Technical Trading, Technical Analysis, Efficient Market Hypothesis, Stock Market, Financial Markets, Trading, algorithm
National Category
Business Administration
Identifiers
URN: urn:nbn:se:umu:diva-170753OAI: oai:DiVA.org:umu-170753DiVA, id: diva2:1430318
Educational program
Study Programme in Business Administration and Economics
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Examiners
Available from: 2020-05-14 Created: 2020-05-14 Last updated: 2020-05-14Bibliographically approved

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CiteExportLink to record
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Citation style
  • apa
  • ieee
  • modern-language-association-8th-edition
  • vancouver
  • Other style
More styles
Language
  • de-DE
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  • en-US
  • fi-FI
  • nn-NO
  • nn-NB
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  • Other locale
More languages
Output format
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  • text
  • asciidoc
  • rtf