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Fundamental Information in Technical Trading Strategies

Authors

  • Ute Bonenkamp,

    1. The first and second authors are from the Department of Accounting and the third author is from the Department of Finance and Centre for Financial Research (CFR), University of Cologne, Germany. They thank Russ Wermers, Norman Strong (Associate Editor), and an anonymous referee for their valuable comments. Moreover, they gratefully acknowledge the helpful comments of participants of the 2009 Centre of Financial Research Finanzmarktkolloquium, the 2009 Conference of the Midwest Finance Association, and the 2009 Conference of the European Accounting Association.
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  • Carsten Homburg,

    1. The first and second authors are from the Department of Accounting and the third author is from the Department of Finance and Centre for Financial Research (CFR), University of Cologne, Germany. They thank Russ Wermers, Norman Strong (Associate Editor), and an anonymous referee for their valuable comments. Moreover, they gratefully acknowledge the helpful comments of participants of the 2009 Centre of Financial Research Finanzmarktkolloquium, the 2009 Conference of the Midwest Finance Association, and the 2009 Conference of the European Accounting Association.
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  • Alexander Kempf

    Corresponding author
    1. The first and second authors are from the Department of Accounting and the third author is from the Department of Finance and Centre for Financial Research (CFR), University of Cologne, Germany. They thank Russ Wermers, Norman Strong (Associate Editor), and an anonymous referee for their valuable comments. Moreover, they gratefully acknowledge the helpful comments of participants of the 2009 Centre of Financial Research Finanzmarktkolloquium, the 2009 Conference of the Midwest Finance Association, and the 2009 Conference of the European Accounting Association.
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Ute Bonenkamp, Albertus Magnus Platz, 50923 Cologne, Germany.
e-mail: bonenkamp@wiso.uni-koeln.de

Abstract

Abstract:  Technical trading strategies assume that past price trends predict future ones. Their application may be profitable if the past trend reflects fundamental information that has not yet been fully priced. However, if the trend merely reflects temporary pricing pressures, technical trading will presumably fail. We argue that using financial statements as an additional source of information helps to avoid such failure. We implement a trading strategy that uses operating cash flows to identify enduring past price upturns. This strategy outperforms a purely technical momentum strategy, seems to be practicable, and its profits exceed transactions costs.

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