Notwithstanding its widespread use in financial markets and well-documented profitability, technical analysis is still perceived to carry useless information. This paper provides a possible explanation for this puzzle that goes beyond the standard self-fulfilling prophecy argumentation. If at least some of the asset price fundamentals are not currently observable, the oscillator model is able to infer regime shifts in the process of these variables through past asset prices. From this point of view, technical analysis can be interpreted as a cheap proxy for Bayesian learning.

Published in the North American Journal Economics and Finance

Prof. Stefan Reitz

Department of Economics, University of Giessen, Germany

Summary:

•Abstract - Introduction

•The basic learning model

•The Derivation of Rational Sign Predictions

•Empirical Evidence

•Model specification

•Estimation results and specification tests

•Concluding remarks

•Literature

•Books Related