Why investors use technical analysis? Information discovery versus herding behavior

Abstract

Purpose

The purpose of this paper is to establish two competitive models to explain why investors use technical analysis (TA).

Design/methodology/approach

Information Discovery Model suggests that technical traders are able to infer non-public information; Herding Behavior Model argues that TA is a kind of irrational herding behavior that can make profit when other noise traders exist.

Findings

The empirical results from Chinese stock market show that some technical trading rules generate significant excess returns.

Research limitations/implications

The empirical results from Chinese stock market show that some technical trading rules generate significant excess returns. Stocks with stronger information asymmetry and lower liquidity experiences higher excess return, which support the Information Discovery Model that TA is a method of information discovery for rational investors when the market is not fully efficient.

Originality/value

Stocks with stronger information asymmetry and lower liquidity experiences higher excess return, which support the Information Discovery Model that TA is a method of information discovery for rational investors when the market is not fully efficient.

Citation

Wang, T. and Sun, Q. (2015), "Why investors use technical analysis? Information discovery versus herding behavior", China Finance Review International, Vol. 5 No. 1, pp. 53-68. https://doi.org/10.1108/CFRI-08-2014-0033