Trading signals of the relative strength index and market valuation of State Treasury companies listed on the Warsaw Stock Exchange

Abstract Accurate forecasting of the level of volatility of financial instrument prices is important from the point of view of stock exchange investors. The aim of this paper is to measure the value relevance of transaction signals (buy/sell) by the relative strength index (RSI) in the case of State Treasury companies listed on the Warsaw Stock Exchange (WSE). The research covered the two hypotheses stating that stock buy (sell) transaction signals generated by the RSI indicator cause the occurrence of statistically significant positive (negative) abnormal returns (AR). These, in turn, support that RSI generates value-relevant signals, which are valuable investment tools and can be used to earn money on the stock exchanges. Based on the final research sample, including 75 buy signals and 88 sell signals, generated by the RSI indicator on the shares of State Treasury companies listed on WSE, an event study methodology was carried out. In 7-day event windows, calculations were made of AR, which is the difference between the realized and the expected return (estimated on the basis of the market model). The averaged ARs did not differ statistically significantly from zero on any of the tested days for both buy and sell signals. Therefore, research results do not indicate that share purchase (sell) transaction signals generated by the RSI indicator result in the occurrence of statistically significant positive (negative) average abnormal returns (AAR).