Return Predictability and Efficient Market Hypothesis: Evidence from Iceland

The authors examine whether technical analysis has predictive power in the case of the OMX Iceland All-Share Index. If trading rules have predictive power, could a trader design a strategy to beat the profitability of the buy-and-hold strategy, considering transaction costs and risk? The authors use four trading rules and test their profitability in the case of the OMX Iceland All-Share Index for the period from April 30, 1999 through December 30, 2016. They first conclude that trading rules have predictive power. They then design four strategies for each trading rule and conclude that it is possible to exploit the predictive power of these rules. Finally, they consider both risk and transaction costs of various trading rules and find three rules—MA200, MA150, and MACD—that can beat the buy-and-hold strategy for the entire period and each subperiod, even considering risk and transaction costs. TOPICS:Mutual funds/passive investing/indexing, technical analysis, developed, quantitative methods