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Dynamic Asset Allocation Using a Combined Criteria Decision System

Author

Listed:
  • Giuseppe Galloppo
Abstract
In this paper we examine the predictability of asset returns by developing an approach that combines quantitative methods of forecasting, based on technical analysis. As an innovation we introduce a multiple criteria decision system making simultaneous use of trend indicators and other confirming indicators. By combining trend indicators with confirming indicators it is possible to build a superior technical trading strategy that captures a more comprehensive aspect of predictability in past prices. This study also proposes a test for weak form efficiency based on a combining approach. Previous approaches typically make inferences based on the empirical results of testing only one class of technical rules. Applying the combining criteria decision system the evidence suggests that the strategies proposed here have predictive ability on a data sample based on three European stocks Index Markets. Our results rejects the null hypothesis that the returns earned from applying trading rules are equal to those achieved from a naive buy and hold strategy, even after deducting transaction costs. Evidence also suggests that oscillators capture some aspect of predictability in past prices that moving averages do not detect.

Suggested Citation

  • Giuseppe Galloppo, 2009. "Dynamic Asset Allocation Using a Combined Criteria Decision System," Accounting & Taxation, The Institute for Business and Finance Research, vol. 1(1), pages 29-44.
    • Handle: RePEc:ibf:acttax:v:1:y:2009:i:1:p:29-44
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    File URL: http://www.theibfr2.com/RePEc/ibf/acttax/at-v1n1-2009/AT-V1N1-2009-3.pdf
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    References listed on IDEAS

    as
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    2. Muhannad A. Atmeh & Ian M. Dobbs, 2006. "Technical analysis and the stochastic properties of the Jordanian stock market index return," Studies in Economics and Finance, Emerald Group Publishing, vol. 23(2), pages 119-140, June.
    3. Reitz, Stefan, 2006. "On the predictive content of technical analysis," The North American Journal of Economics and Finance, Elsevier, vol. 17(2), pages 121-137, August.
    4. Jensen, Michael C., 1978. "Some anomalous evidence regarding market efficiency," Journal of Financial Economics, Elsevier, vol. 6(2-3), pages 95-101.
    5. F. FernAndez-RodrIguez & S. Sosvilla-Rivero & J. Andrada-FElix, 2003. "Technical analysis in foreign exchange markets: evidence from the EMS," Applied Financial Economics, Taylor & Francis Journals, vol. 13(2), pages 113-122.
    6. Neftci, Salih N, 1991. "Naive Trading Rules in Financial Markets and Wiener-Kolmogorov Prediction Theory: A Study of "Technical Analysis."," The Journal of Business, University of Chicago Press, vol. 64(4), pages 549-571, October.
    7. Michael Glezakos & Petros Mylonas, 2003. "Technical Analysis Seems To Be A Valuable Investment Tool In The Athens And Frankfurt Stock Exchanges," European Research Studies Journal, European Research Studies Journal, vol. 0(1-2), pages 169-192, January -.
    8. Fang, Yue & Xu, Daming, 2003. "The predictability of asset returns: an approach combining technical analysis and time series forecasts," International Journal of Forecasting, Elsevier, vol. 19(3), pages 369-385.
    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Senol Emir & Hasan Dincer & Umit Hacioglu & Serhat Yuksel, 2016. "Random Regression Forest Model using Technical Analysis Variables: An application on Turkish Banking Sector in Borsa Istanbul (BIST)," International Journal of Finance & Banking Studies, Center for the Strategic Studies in Business and Finance, vol. 5(3), pages 85-102, April.

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    More about this item

    Keywords

    Technical Analysis; Market Timing; Efficient Market Hypothesis;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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