A generalized moving average convergence/divergence for testing semi-strong market efficiency

We aim to monitor financial asset price series by a generalized version of the moving average convergence/divergence (MACD) trend indicator which is currently employed as technical indicator in trading systems. We use the proposed indicator to test the semi-strong form of market efficiency hypothesis stating that asset prices follows a martingale model when, on the basis of the information available up to a given time, the expected returns are equal to zero. By assuming a martingale model with drift for prices, we propose an MACD-based test statistic for the local drift and derive its main theoretical properties. The semi-strong market efficiency hypothesis is assessed through a nonparametric bootstrap test, where under the null hypothesis the prices have no drift. A simulation study shows that the empirical size and power of the bootstrap test rapidly converges to the chosen nominal levels. Finally, we use our test to derive a long/short equity trading strategy where no active positions are taken or maintained under the null hypothesis (no drift). We apply this strategy to monitor 1,469 daily quotes of the crude oil prices over the six year period 2010-2016 finding that our methodology is often capable to detect market inefficiencies by accruing positive returns.