Moving Median Against Moving Average, Institutional Investors Against Private Investors and Market Efficiency

Abstract

A typical way of testing the hypothesis of market efficiency is to compare the performance of technical trading rules with the buy and hold strategy. In this work, an alternative technical rule is proposed based on moving median, and its predictive power for the Athens Stock Exchange (ASE) is contrasted with that of the most popular technical trading rule of moving average, with and without the true transaction costs existing in ASE. In the theoretical case of no transaction costs empirical findings show that the predictive power of the moving median rule is higher than that of the moving average rule, while both perform better than the passive strategy. Hence, for both trading rules the hypothesis of weak-form efficiency is rejected. By introducing true transaction costs and simulating various scenarios for the investors’ status, it is found that the moving median trading rule still outperforms the moving average one. Further, in terms of efficiency, evidence shows that it is still possible for an institutional investor to beat the specific market, even marginally, but this is not the case for a typical small investor, due to higher transaction costs for the latter. Consequently, the result on the testing of the hypothesis of efficient markets, given true transaction costs, depends on the status of the investor.