Kapitalmarkteffizienz und Point & Figure Analyse

Abstract

Capital Market Efficiency and Point & Figure Analysis

Point and figure analysis is a chart technique. Its object is to derive from past prices information on future price movements in order to “beat to market”. Hockmann is the first to present a comprehensive study of point and figure charts. In his simulation study, he finds confirmation of the point and figure technique. For all that, there has been controversial debate on his work. The present strategy simulation for point and figure analysis is intended to provide further information on the advantages of this chart technique and hence on the validity of the weak efficiency thesis for the German stock market. First, several methodological weaknesses in Hockmann’s study are enumerated. Then, on the basis of arandom sample of public companies from the Karlsruher Kapitalmarktdatenbank, point and figure strategies are simulated. Special attention is paid to various subperiods: For instance, distinctions are drawn among the total period, subperiods according to the tone of the stock exchange and overlapping, rolling subperiods. Here the success of the point and figure technique proves to be very much dependent on the subperiod under consideration. The chart technique is superior to a simple buy and hold strategy especially when the stock index fluctuates markedly about a fixed level. Otherwise the buy and hold strategy is preferable asa rule. Since, however, theinvestor cannot know the future tone of the market in advance, it seems to us that there is no systematic superiority of the'point and figure technique over a buy and hold strategy. This must be taken as confirmation of the weak efficiency thesis.