Evidence of a complementary relationship between fundamental and technical analysis in the Finnish stock market

Abstract

Through modern history, market participants have continuously aspired to find means to predict future prices for profit opportunities. Considering the classic theory of market efficiency, this should not be possible. However, there are versatile and extensive body of literature presenting highly significant results of models predicting future prices or stock returns.

Two often competing methods to strive for abnormal returns have been noticed by the academic community: technical and fundamental analysis. These methods of analyzing securities are often seen as separate and examined in isolation of each other. This stems from their entirely differing point of views. A technical analyst studies pricing information alone while a fundamental analyst attempts to determine the true value of a stock based on their financial statements and forecasts on the future. However, several recent studies have found that there is value in combining the methods to benefit from their complementary relationship rather than considering them as substitutes.

In this thesis, I study this proposed complementary relationship in Finland by following the methodology introduced in the study of Bettman, Sault & Shultz (2009). The explanatory power of fundamental and technical models is first examined in isolation and finally alongside by integrating the models to create a hybrid model of explaining stock prices of Finnish firms with technical and fundamental factors. Based on the results found in this thesis, fundamental factors seem to possess greater ability to predict and explain future prices than technical factors in the Finnish market during the sample period from 2000 to 2018. Through the examination of the evolution of adjusted R2, Akaike Information Criterion and log likelihood values, it is evident from the data that there is value in considering technical and fundamental analysis as complementary rather than competing models of analyzing securities.