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Behavioral Finance and Technical Analysis

Author

Listed:
  • Dehnad, Kosrow

    (COLUMBIA UNIVERSITY/SAMBA FINANCIAL GROUP)

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
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    Citations

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    Cited by:

    1. Bashir Ahmad Joo & Kokab Durri, 2015. "Comprehensive Review of Literature on Behavioural Finance," Indian Journal of Commerce and Management Studies, Educational Research Multimedia & Publications,India, vol. 6(2), pages 11-19, May.
    2. Agarwal, Rounak, 2023. "A study to assess the validity of Michael Joe Huddleston’s technical analysis concept (ICT Power Of 3) in the foreign exchange market," OSF Preprints 7yw86, Center for Open Science.

    More about this item

    Keywords

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

    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

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