Tactical asset allocation on technical trading rules and data snooping

Abstract

In this paper, we investigate the performance of tactical asset allocation on technical trading rules controlling for data snooping bias. By using reality check (RC), superior predictive ability (SPA) test and their extensions, and false discovery rate (FDR), we find that none of 15376 technical trading rules at monthly frequency outperforms buy-and-hold (B&H) strategy in terms of 1/N portfolio. In addition, we also investigate the performance of tactical asset allocation in terms of other usual portfolio strategies: minimum variance portfolio (MVP), tangency portfolio (TP), equally weighted risk contribution portfolio (ERCP), most diversified portfolio (MDP), Volatility timing portfolio (VTP) and Reward-to-risk timing portfolio (RRTP). Our empirical study shows that no tactical asset allocation strategies on technical trading rules outperform B&H benchmark. Our findings call into question the value of tactical asset allocation on technical trading rules.