Technical analysis: An asset allocation perspective on the use of moving averages |
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Authors: | Yingzi Zhu Guofu Zhou |
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Affiliation: | 1. School of Economics and Management, Tsinghua University, Beijing 100084, China;2. Olin Business School, Washington University in St. Louis, St. Louis, MO 63130, USA;3. China Center for Financial Research, Tsinghua University, Beijing 100084, China |
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Abstract: | In this paper, we analyze the usefulness of technical analysis, specifically the widely employed 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 uncertainty exists about predictability, which is likely in practice, 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 the model governing the stock price is uncertain. |
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Keywords: | G11 G12 G14 C11 C61 |
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