Trend and Stochastic movements in international financial markets

Abstract

This study provides a contemporary analysis of the dynamic interplay between persistent trends and short-term stochastic movements in international financial markets, challenging the traditional view of an efficient market. Through a quantitative examination of the S&P 500, FTSE 100, Nikkei 225, DAX, and CAC 40 using daily closing prices from 2000 to 2023, the research employs a 50-day SMA to identify trends and a 14-day stochastic oscillator to gauge whether some financial markets are overbought or oversold. The findings reveal distinct, regime-dependent market behaviors across different economies, with strong uptrends in the United States and Germany contrasting with weaker trends in the United Kingdom and France and a downtrend in Japan. The results empirically demonstrate that a trend following strategy, which goes long during uptrends and remains neutral during downtrends, consistently enhances risk adjusted returns and preserves capital compared to a static buy and hold approach. Furthermore, correlation analysis emphasis that effective global diversification requires an understanding of synchronous market regimes, not just holding different assets. The findings of this study suggest that disciplined, regime aware framework, integrating both trend and momentum signals, is essential for robust global asset allocation in today's complex financial landscape making it a noteworthy contribution.

Keywords: {'name': 'Stochastic Movements; Simple Moving Average; financial markets; Efficient market hypothesis.'}

Authors & affiliations

Samuel Tabot Enow
The IIE VEGA School

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