Can technical analysis create returns for beta-based portfolios in the Indian market?

Abstract

Beta serves as a critical measure in portfolio optimization, capturing systematic risk and underpinning numerous asset-pricing frameworks. The present study examines the performance of beta-based portfolios of NSE 500 firms over 27 years using technical trading strategies – Simple Moving Average (SMA) and Exponential Moving Average (EMA) – across short-to-long-time horizon windows. Portfolios are constructed based on beta deciles to examine the relationship between systematic risk exposure and trading-rule effectiveness. The study incorporates transaction costs, emphasizing how trading frequency across five window lengths (5, 10, 20, 50, and 100 days) affects net returns and multiple risk-adjusted performance metrics. The findings indicate that technical trading strategies are more effective than the buy-and-hold (BH) strategy for beta portfolios. The SMA and EMA strategies demonstrate substantial positive alphas before transaction-cost adjustments. Mid-beta portfolios consistently show high returns and statistically significant alphas (ranging from 7% to 14% for SMA and EMA), confirming that technical strategies are most effective in beta portfolios with moderate systematic risk exposure. Further, transaction costs erode much of the excess returns generated by shorter-lag strategies. Despite this, selected mid-beta portfolios continue to generate net positive alpha (ranging between 6% to 11% for 20 and 50- day SMA/EMA) at longer windows, highlighting their resilience and practicality in real-world scenarios. These findings are further validated using various risk-adjusted performance metrics.