Description:
We show that the moving averages (MAs) of stock market indices act as psychological barriers. We reveal that market indices do not move continuously near their MAs, especially in markets dominated by unsophisticated investors. Using international data, we find that a stock market index’s MA exerts a significant impact on future index returns when it is crossed over, and the effect is distinct from both the 52-week high effect of George and Hwang (2004) and the historical high effect of Li and Yu (2012). The MA effect is stronger when investors’ sophistication is lower or when their anchoring propensity is higher. A trading strategy formulated based on the MA effect generates an average abnormal annual return of 1.69% to 4.26% in international markets