Re-Examining the Profitability of Technical Analysis with White's Reality Check and Hansen's Spa Test

27 Pages Posted: 8 Apr 2005

See all articles by Po-Hsuan Hsu

Po-Hsuan Hsu

University of Hong Kong

Chung-Ming Kuan

Department of Finance, National Taiwan University

Date Written: March 2005

Abstract

In this paper, we re-examine the profitability of technical analysis using White's Reality Check and Hansen's SPA test that correct the data snooping bias. Comparing to previous studies, we study a more complete universe of trading techniques, including not only simple rules but also investor's strategies, and we test the profitability of these rules and strategies with four main indices. It is found that significantly profitable simple rules and investor's strategies do exist in the data from relatively young markets (NASDAQ Composite and Russell 2000) but not in the data from relatively mature markets (DJIA and S&P 500). Moreover, after taking transaction costs into account, we find that the best rules for NASDAQ Composite and Russell 2000 outperform the buy-and-hold strategy in most in- and out-of-sample periods. Our results thus suggest that the degree of market efficiency may be related to market maturity. It is also found that investor's strategies are able to improve on the profits of simple rules and may even generate significant profits from unprofitable simple rules.

Keywords: data snooping, investor's strategies, SPA test, stationary bootstrap, technical analysis, trading rules, White's Reality Check

JEL Classification: C12, C53, G14

Suggested Citation

Hsu, Po-Hsuan and Kuan, Chung-Ming, Re-Examining the Profitability of Technical Analysis with White's Reality Check and Hansen's Spa Test (March 2005). Available at SSRN: https://ssrn.com/abstract=685361 or http://dx.doi.org/10.2139/ssrn.685361

Po-Hsuan Hsu

University of Hong Kong ( email )

Pokfulam Road
Hong Kong
China

Chung-Ming Kuan (Contact Author)

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

Register to save articles to
your library

Register

Paper statistics

Downloads
2,468
rank
4,631
Abstract Views
12,254
PlumX