Technical Analysis and Risk Premium in Indian Equity Market: A Multiple Regression Analysis
The purpose of this paper is to estimate the effectiveness of technical trading strategies and examine the extent to which trading profitability using technical analysis indicators explains the 'risk premium' or 'risk compensation' for investing in equity markets as against assets that are relatively risk free using multiple regression analysis. The technical indicators selected for the analysis are Bollinger bands (volatility indicator) moving average (trend indicator) Relative Strength Index (momentum indicator) and Elliot wave theory (mass psychology indicator) The paper finds evidence for risk premium being explained by technical indicators. The technical trading strategy based on trend, momentum, volatility indicators, including the Elliot wave theory has the ability to explain the excess return of a stock. The findings have important implications for traders and practitioners. A positive relationship implies that technical indicators can be explored while evaluating strategies for investment. So, it suggests that traders, retail investors and fund managers, while evaluating portfolios, can rely on technical indicators based trading strategies other than fundamental analysis.