IDEAS home Printed from
   My bibliography  Save this article

Behavioral Finance and Technical Analysis


  • Dehnad, Kosrow



Abstract Behavioural finance has challenged many claims of efficient market hypothesis (EMH). Unfortunately many of these challenges are in the form of anecdotal evidence and lack quantification. This article uses market data together with some simple statistics to show that in practice certain assertions of EMH and mathematical finance can be rejected with a high degree of confidence. The working of the FX market is used to demonstrate certain shortcomings of elegant results in mathematical finance that render them irrelevant in practice. An approach based on Markov chains is developed to model certain heuristic notions such as “fast market,” “support,” and “resistance,” that are widely used by “technical analysts” and practitioners. Using market observation, it is shown that this model better fits historical data than that implied by the assumption that daily returns are independent and normally distributed.

Suggested Citation

  • Dehnad, Kosrow, 2011. "Behavioral Finance and Technical Analysis," Journal of Financial Transformation, Capco Institute, vol. 32, pages 107-111.
  • Handle: RePEc:ris:jofitr:1464

    Download full text from publisher

    To our knowledge, this item is not available for download. To find whether it is available, there are three options:
    1. Check below whether another version of this item is available online.
    2. Check on the provider's web page whether it is in fact available.
    3. Perform a search for a similarly titled item that would be available.

    More about this item


    Behavioral Finance; Technical Analysis; Volatility; Brownian Motion; Foreign Exchange; Efficient Market Hypothesis; Markov Chains; Mathematical Finance;

    JEL classification:

    • C00 - Mathematical and Quantitative Methods - - General - - - General
    • C18 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Methodolical Issues: General
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • C54 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Quantitative Policy Modeling
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ris:jofitr:1464. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Prof. Shahin Shojai). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.