In this study, we examine whether asset pricing anomalies caused by the volatility effect and the size effect exist in Taiwan’s stock market, and investigate whether investors can exploit abnormal returns therein by applying the popular moving-average technical trading rule. We construct investment portfolios based on firms’ return volatility or market capitalization, and apply the moving-average rule to determine the timing for buying these portfolios. Our empirical results demonstrate that, a combination of the moving-average buying indicator and the volatility (or size) effect do generate higher returns than the traditional buy-and-hold strategy, and the size of such abnormal return typically decreases with the length of the moving average rule employed. Furthermore, we propose a zero-cost investment strategy by buying the highest volatility (or smallest size) portfolio, and short-selling the lowest volatility (or largest size) portfolio based on the moving-average signals. The overall evidence suggests that such a zero-cost investment strategy generates significantly positive returns, and the results are not affected by the consideration of transaction costs. With robustness checks, we also show that such abnormal returns cannot be fully explained by the momentum effect, macroeconomic conditions, market states, or the market timing ability.
