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Asset allocation strategies, data snooping, and the 1 / N rule

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  • Hsu, Po-Hsuan
  • Han, Qiheng
  • Wu, Wensheng
  • Cao, Zhiguang

Abstract

Using a series of advanced tests from White's (2000) “Reality Check” to correct for data-snooping bias, we assess the out-of-sample performance of various portfolio strategies relative to the naive 1/N rule. When we analyze 16 basic portfolio strategies, 126 learning strategies, and nearly 2,000 extended strategies, we find that some strategies outperform the 1/N rule in conventional tests that do not account for data-snooping bias. However, after we use the new tests that control for such bias, we find that none or very few of these strategies outperform the 1/N rule. Thus, our finding underscores the necessity to control for data-snooping bias when making asset allocation decisions.

Suggested Citation

  • Hsu, Po-Hsuan & Han, Qiheng & Wu, Wensheng & Cao, Zhiguang, 2018. "Asset allocation strategies, data snooping, and the 1 / N rule," Journal of Banking & Finance, Elsevier, vol. 97(C), pages 257-269.
  • Handle: RePEc:eee:jbfina:v:97:y:2018:i:c:p:257-269
    DOI: 10.1016/j.jbankfin.2018.09.021
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    More about this item

    Keywords

    Reality check; Portfolio strategies; Data-snooping bias;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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