Technical Analysis and Theory of Finance
Technical analysis, that derives trading strategies based on past prices, is popular in investment practice, but its empirical evidence is mixed due to a potential problem in data-snooping. In this paper, we ask whether there exist any theoretical rationales for an investor to use it in asset allocation. We find that it can always add value to a fixed allocation rule that invests a fixed portion of wealth into the stock market (as dictated by the random walk theory of stock prices or by the popular mean-variance approach) when the stock returns are predictable. When model parameters are unknown and have to be estimated from data as is the case in practice, we find that the combination of the fixed rule with technical analysis outperforms the optimal learning rule, which are prior dependent, when the priors are reasonable and yet not too informative.
Yingzi Zhu Guofu Zhou
School of Economics and Management, Tsinghua University, Beijing, China Olin School of Business, Washington University, St.Louis, MO 63130
国际会议
成都
英文
1-49
2007-07-09（万方平台首次上网日期，不代表论文的发表时间）