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Predictability Of Moving Average Rules And Nonlinear Properties Of Stock Returns: Evidence From The China Stock Market

  • Zhigang Wang

    ()

    (School of Management and Economics, University of Electronic Science and Technology of China, North Jianshe Road, Chengdu 610054, China)

  • Yong Zeng

    ()

    (School of Management and Economics, University of Electronic Science and Technology of China, North Jianshe Road, Chengdu 610054, China)

  • Heping Pan

    ()

    (School of Management and Economics, University of Electronic Science and Technology of China, North Jianshe Road, Chengdu 610054, China)

  • Ping Li

    ()

    (School of Management and Economics, University of Electronic Science and Technology of China, North Jianshe Road, Chengdu 610054, China)

Registered author(s):

    This paper investigates the predictability of moving average rules for the China stock market. We find that buy signals generate higher returns and less volatility, while returns following sell signals are negative and more volatile. Moreover, the bootstrapping results indicate that the asymmetrical patterns of return and volatility between buy and sell signals cannot be explained by four popular linear models of returns, especially the phenomenon of negative sell returns. We then test the nonlinear dynamic process of returns. Although the existing artificial neural network (ANN) model can replicate the negative sell returns, it fails to capture the volatility patterns of buy and sell returns. Furthermore, we introduce the conditional heteroskedasticity structure into the ANN model and find that the revised ANN model cannot only explain the predictability of returns, but can also capture the patterns of buy and sell volatility, which are never achieved by any linear model of returns tested in the related literature. Therefore, we conclude that the moving average trading rules can pick up some of the hidden nonlinear patterns in the dynamic process of stock returns, which may be the reason why they can be used to predict price changes.

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    Article provided by World Scientific Publishing Co. Pte. Ltd. in its journal New Mathematics and Natural Computation.

    Volume (Year): 07 (2011)
    Issue (Month): 02 ()
    Pages: 267-279

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    Handle: RePEc:wsi:nmncxx:v:07:y:2011:i:02:p:267-279
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