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

Po-Hsuan Hsu

University of Hong Kong

Yu-Chin Hsu

University of Missouri at Columbia - Department of Economics

Chung-Ming Kuan

Department of Finance, National Taiwan University

Date Written: July 20, 2009

Abstract

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

Hsu, Po-Hsuan and Hsu, Yu-Chin and Kuan, Chung-Ming, Testing the Predictive Ability of Technical Analysis Using a New Stepwise Test Without Data Snooping Bias (July 20, 2009). Available at SSRN: https://ssrn.com/abstract=1087044 or http://dx.doi.org/10.2139/ssrn.1087044

Po-Hsuan Hsu (Contact Author)

University of Hong Kong ( email )

Pokfulam Road
Hong Kong
China

Yu-Chin Hsu

University of Missouri at Columbia - Department of Economics ( email )

118 Professional Building
Columbia, MO 65211
United States
(573) 882-6474 (Phone)
(573) 882-2697 (Fax)

HOME PAGE: http://yuchinhsu.yolasite.com/

Chung-Ming Kuan

Department of Finance, National Taiwan University ( email )

1, Sec. 4, Roosevelt Road
Taipei, 106
Taiwan
886 2 3366-9541 (Phone)

HOME PAGE: http://homepage.ntu.edu.tw/~ckuan

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