The Profitability of Trading Rules and Volatility in Emerging Financial Markets

This book is a study of the profitability of technical and fundamental trading rules in emerging financial markets (stock and foreign exchange markets) using Kuwait as a case study. The ultimate objective of the study is to demonstrate that financial volatility can be attributed to the heterogeneity of traders with respect to the trading strategies they use. A number of trading strategies are considered, including those based on expectation formation mechanisms, quantitative technical indicators, filter rules, moving average rules, fundamental trading rules, and the price-volume relation. The profitability of each trading rule is then compared to the profitability of a passive buy and hold strategy. Based on the profitability of these rules, weights are assigned to each strategy to simulate financial prices (two stock prices and two exchange rates). By comparing the statistical distributions of the actual and simulated financial prices, it is shown that there is ample evidence indicating the effect of heterogeneity on volatility. The study also presents some evidence of the roles played by technicians and fundamentalists in financial price determination.