AN EMPIRICAL TEST OF A 14-DAY MONEY FLOW INDEX AND RELATIVE STRENGTH INDEX HYBRID’S PREDICTIVE ABILITIES ON HELSINKI, OSLO AND STOCKHOLM STOCK EXCHANGES

Abstract

Technical analysis has been used in stock market forecasts for more than a century and it is one of the basic applications of the modern day finance. However these methods have for decades raised conflicting opinions in the science community, leaving the field a subject of disdain by academics. The purpose of this thesis is to test whether a hybrid of money flow index (MFI) and relative strength index (RSI) yields abnormal returns on Helsinki, Oslo and Stockholm stock exchanges. The hybrid of MFI and RSI is a volume weighted RSI, which’ predictive power is solely based on utilization of historical stock prices and trading volumes. MFI-RSI hybrid measures market momentum and indicates ‘oversold’ and ‘overbought’ levels on the market oscillating between 0 and 100.

The predictability of the market will be studied by applying the MFI-RSI vehicle on equally weighted country indices and a combined portfolio of the 450 stocks. The results indicate that MFI-RSI hybrid has trend predicting abilities at 5 % significance level on a bear market, but the transaction costs erode the profits on a bull market. The results suggest market efficiency in Finland, Norway and Sweden, yet the predictive power under distress market condition signals of a change in the investor sentiment during financial crisis. In addition to the excess returns, an insight is taken on the strategy’s risk reducing properties.