Learning and predictability via technical analysis: Evidence from bitcoin and stocks with hard-to-value fundamentals

Andrew Detzel; Hong Liu; Jack Strauss; Guofu Zhou; Yingzi Zhu

doi:10.1111/fima.12310

Learning and predictability via technical analysis: Evidence from bitcoin and stocks with hard-to-value fundamentals

Andrew Detzel, Hong Liu, Jack Strauss, Guofu Zhou, Yingzi Zhu

Research output: Contribution to journal › Article › peer-review

63 Scopus citations

Abstract

What predicts returns on assets with “hard-to-value” fundamentals such as Bitcoin and stocks in new industries? We are the first to propose an equilibrium model that shows how technical analysis can arise endogenously via rational learning, providing a theoretical foundation for using technical analysis in practice. We document that ratios of prices to their moving averages forecast daily Bitcoin returns in and out of sample. Trading strategies based on these ratios generate an economically significant alpha and Sharpe ratio gains relative to a buy-and-hold position. Similar results hold for small-cap, young-firm, and low analyst-coverage stocks as well as NASDAQ stocks during the dotcom era.

Original language	English
Pages (from-to)	107-137
Number of pages	31
Journal	Financial Management
Volume	50
Issue number	1
DOIs	https://doi.org/10.1111/fima.12310
State	Published - Mar 1 2021

Keywords

Bitcoin
cryptocurrency
learning
return predictability
technical analysis

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10.1111/fima.12310

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title = "Learning and predictability via technical analysis: Evidence from bitcoin and stocks with hard-to-value fundamentals",

abstract = "What predicts returns on assets with “hard-to-value” fundamentals such as Bitcoin and stocks in new industries? We are the first to propose an equilibrium model that shows how technical analysis can arise endogenously via rational learning, providing a theoretical foundation for using technical analysis in practice. We document that ratios of prices to their moving averages forecast daily Bitcoin returns in and out of sample. Trading strategies based on these ratios generate an economically significant alpha and Sharpe ratio gains relative to a buy-and-hold position. Similar results hold for small-cap, young-firm, and low analyst-coverage stocks as well as NASDAQ stocks during the dotcom era.",

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AU - Zhu, Yingzi

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Learning and predictability via technical analysis: Evidence from bitcoin and stocks with hard-to-value fundamentals

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Keywords

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