Beyond the Norm

Financial analysis and modelling are becoming increasingly relevant in modern finance. There is strong need for greater flexibility and wider coverage in the applications of trading, asset pricing and risk management, highlighted by the systemic collapse of financial institutions during the global financial crisis of 2007-08. Financial institutions that had aimed for profit maximisation now felt the need to constrain growth and use better modelling and risk management tools. There is also a sharp increase in the need to conceive and apply these models and tools in an innovative manner. This thesis presents studies in three different categories of analysis: the study of technical analysis and its use as an indicator for market risk and efficiency; the application of survivorship bias in a post-financial crisis environment and its effects on risk-reward structures of short to long term investment; and the opportunity for arbitrage by taking advantage of regulatory restrictions such as circuit breakers and price limits. This thesis studies three markets, the Australian, US, and Chinese Equity markets across three investigations respectively.

The first study explores a new explanation of why technical analysis still prevails despite evidence against it in the form of market efficiency. Rational investors should use technical analysis to benefit themselves. This study postulates that if abnormal excess return cannot be consistently generated, investors use technical analysis to reduce transaction costs and overall risk of trade. Connections can be drawn by exploring the links between common technical indicators and market efficiency proxies such as spread, liquidity and order book depth. The spread measures the implicit transaction cost as well as being an indicator of relative market efficiency. Market liquidity provides insight into how investors with large amounts of capital can potentially work their orders to minimise slippage. Order book depth explores the level of potential slippage relative to trading size experienced by these investors when choosing to operate with technical analysis as their trading signal.