Re-Examining the Profitability of Technical Analysis with White’s Reality Check
AbstractIn this paper, we re-examine the profitability of technical analysis using the Reality Check of White (2000, Econometrica) that corrects the data snooping bias. Comparing to previous studies, we study a more complete “universe” of trading techniques, including not only simple trading rules but also investor’s strategies, and we test the profitability of these rules and strategies with four main indices from both relatively mature and young markets. It is found that profitable simple rules and investor’s strategies do exist with statistical significance for NASDAQ Composite and Russell 2000 but not for DJIA and S&P 500. Moreover, the best rules for NASDAQ Composite and Russell 2000 outperform the buy-and-hold strategy in most in- and out-of-sample periods, even when transaction costs are taken into account. We also find that investor’s strategies are able to improve on the profits of simple rules and may even generate significant profits from unprofitable simple rules.
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Bibliographic InfoPaper provided by Institute of Economics, Academia Sinica, Taipei, Taiwan in its series IEAS Working Paper : academic research with number 04-A003.
Length: 26 pages
Date of creation: Feb 2004
Date of revision:
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Web page: http://www.econ.sinica.edu.tw/index.php?foreLang=en
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data snooping; investor’s strategies; stationary bootstrap; technical analysis; trading rules; White’s Reality Check.;
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