The Effectiveness Of Technical Analysis Of The Stock Market In China

We use pattern recognition method to test the effectiveness of the eight technicalpatterns, namely Head-and-Shoulders, Inversed Head-and-Shoulders, Boarding Top,Boarding Bottom, Triangle Top, Triangle Bottom, Rectangle Top, Rectangle Bottom,in the Chinese stock market. We use the identification procedure first proposed byAndrew W. Lo (2000) using Kernel regression method as the smoothing estimator,defining technical patterns according to the value and order of local extrema of thesmoothed price series, and identifying patterns using a rolling window method.Furthermore, we find significant difference between the distribution of stock dailyreturns and the conditional returns of the patterns we detected using the stated methodin Shanghai Stock Exchange Market. We also find that some of the patternsmentioned may generate excess returns after adjusting the risk of each individualstock by the plain CAPM model. These results provide empirical evidence of theeffectiveness of technical analysis in Chinese stock market.