Testing the Predictive Ability of Technical Analysis Using a New Stepwise Test Without Data Snooping Bias
35 Pages Posted: 3 Feb 2008 Last revised: 21 Aug 2009
Date Written: July 20, 2009
In the finance literature, statistical inferences for large-scale testing problems usually suffer from data snooping bias. In this paper we extend the "superior predictive ability" (SPA) test of Hansen (2005, JBES) to a stepwise SPA test that can identify predictive models without potential data snooping bias. It is shown analytically and by simulations that the stepwise SPA test is more powerful than the stepwise Reality Check test of Romano and Wolf (2005, Econometrica). We then apply the proposed test to examine the predictive ability of technical trading rules based on the data of growth and emerging market indices and their exchange traded funds (ETFs). It is found that technical trading rules have significant predictive power for these markets, yet such evidence weakens after the ETFs are introduced.
Keywords: data snooping, exchange traded funds, reality check, SPA test, stepwise test, technical trading rules
JEL Classification: C12, C32, C52, G11
Suggested Citation: Suggested Citation