Technical Analysis and Theory of Finance

54 Pages Posted: 5 Mar 2007  

Yingzi Zhu

Tsinghua University - School of Economics & Management

Guofu Zhou

Washington University in St. Louis - Olin School of Business

Date Written: September 17, 2007

Abstract

In this paper, we analyze the usefulness of technical analysis, specifically the widely used moving average trading rule, from an asset allocation perspective. We show that when stock returns are predictable, technical analysis adds value to commonly used allocation rules that invest fixed proportions of wealth in stocks. When there is uncertainty about predictability, the fixed allocation rules combined with technical analysis can outperform the prior-dependent optimal learning rule when the prior is not too informative. Moreover, the technical trading rules are robust to model specification, and they tend to substantially outperform the model-based optimal trading strategies when there is uncertainty about the model governing the stock price.

Keywords: Technical analysis, trading rules, asset allocation, predictability, learning

JEL Classification: G11, G12, G14, C11, C61

Suggested Citation

Zhu, Yingzi and Zhou, Guofu, Technical Analysis and Theory of Finance (September 17, 2007). EFA 2007 Ljubljana Meetings Paper. Available at SSRN: https://ssrn.com/abstract=968216 or http://dx.doi.org/10.2139/ssrn.968216

Yingzi Zhu

Tsinghua University - School of Economics & Management ( email )

Beijing, 100084
China
+86-10-62786041 (Phone)

Guofu Zhou (Contact Author)

Washington University in St. Louis - Olin School of Business ( email )

Washington University
Campus Box 1133
St. Louis, MO 63130-4899
United States
314-935-6384 (Phone)
314-658-6359 (Fax)

HOME PAGE: http://apps.olin.wustl.edu/faculty/zhou/

Paper statistics

Downloads
3,241
Rank
2,363
Abstract Views
10,168