Estimating the Out-of-Sample Predictive Ability of Technical Trading Rules : A Robust Bootstrap Approach

In this paper, we provide a novel way to estimate the out-of-sample predictive ability of a trading rule. Usually, this ability is estimated using a sample-splitting scheme, true out-of-sample data being rarely available. We argue that this method makes poor use of the available data and creates data-mining possibilities. Instead, we introduce an alternative .632 bootstrap approach. This method enables building in-sample and out-of-sample bootstrap datasets that do not overlap but exhibit the same time dependencies. We show in a simulation study that this technique drastically reduces the mean squared error of the estimated predictive ability. We illustrate our methodology on IBM, MSFT and DJIA stock prices, where we compare 11 trading rules specifications. For the considered datasets, two different filter rule specifications have the highest out-of-sample mean excess returns. However, all tested rules cannot beat a simple buy-and-hold strategy when trading at a daily frequency