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Do technical trading profits remain in the foreign exchange market? Evidence from 14 currencies

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  • Cialenco, Igor
  • Protopapadakis, Aris
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    Abstract

    We examine the in- and out-of-sample behavior of two popular trading systems, Alexander and Double MA filters, for 14 developed-country currencies using daily data with bid-ask spreads. We find significant in-sample returns in the early periods. But out-of-sample returns are lower and only occasionally significant. We show that a currency risk factor proposed in the literature is systematically related to these returns. We find no support for the hypotheses that falling transactions costs are responsible for declining trading profits or for the Adaptive Market hypothesis. Importantly, we show that algorithms that simulate out-of-sample returns have serious instability difficulties.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of International Financial Markets, Institutions and Money.

    Volume (Year): 21 (2011)
    Issue (Month): 2 (April)
    Pages: 176-206

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    Handle: RePEc:eee:intfin:v:21:y:2011:i:2:p:176-206

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    Web page: http://www.elsevier.com/locate/intfin

    Related research

    Keywords: Technical rules Alexander filter Double Moving Average Foreign exchange market;

    References

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    1. Neely, Christopher & Weller, Paul & Dittmar, Rob, 1997. "Is Technical Analysis in the Foreign Exchange Market Profitable? A Genetic Programming Approach," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 32(04), pages 405-426, December.
    2. Bong-Chan, Kho, 1996. "Time-varying risk premia, volatility, and technical trading rule profits: Evidence from foreign currency futures markets," Journal of Financial Economics, Elsevier, vol. 41(2), pages 249-290, June.
    3. Hanno Lustig & Nikolai Roussanov & Adrien Verdelhan, 2008. "Common Risk Factors in Currency Markets," NBER Working Papers 14082, National Bureau of Economic Research, Inc.
    4. Martin D.D. Evans & Karen K. Lewis, 1993. "Do Long-Term Swings in the Dollar Affect Estimates of the Risk Premia?," Working Papers 93-12, New York University, Leonard N. Stern School of Business, Department of Economics.
    5. Hansen, Lars Peter & Hodrick, Robert J, 1980. "Forward Exchange Rates as Optimal Predictors of Future Spot Rates: An Econometric Analysis," Journal of Political Economy, University of Chicago Press, vol. 88(5), pages 829-53, October.
    6. Stephan Schulmeister, 1988. "Currency speculation and dollar fluctuations," BNL Quarterly Review, Banca Nazionale del Lavoro, vol. 41(167), pages 343-365.
    7. Cheol-Ho Park & Scott H. Irwin, 2007. "What Do We Know About The Profitability Of Technical Analysis?," Journal of Economic Surveys, Wiley Blackwell, vol. 21(4), pages 786-826, 09.
    8. Christopher J. Neely & Paul A. Weller & Joshua M. Ulrich, 2007. "The adaptive markets hypothesis: evidence from the foreign exchange market," Working Papers 2006-046, Federal Reserve Bank of St. Louis.
    9. Allen, Franklin & Karjalainen, Risto, 1999. "Using genetic algorithms to find technical trading rules," Journal of Financial Economics, Elsevier, vol. 51(2), pages 245-271, February.
    10. Brock, W. & Lakonishok, J. & Lebaron, B., 1991. "Simple Technical Trading Rules And The Stochastic Properties Of Stock Returns," Working papers 90-22, Wisconsin Madison - Social Systems.
    11. Neely, C. J. & Weller, P. A., 2003. "Intraday technical trading in the foreign exchange market," Journal of International Money and Finance, Elsevier, vol. 22(2), pages 223-237, April.
    12. Taylor, Mark P. & Allen, Helen, 1992. "The use of technical analysis in the foreign exchange market," Journal of International Money and Finance, Elsevier, vol. 11(3), pages 304-314, June.
    13. Olson, Dennis, 2004. "Have trading rule profits in the currency markets declined over time?," Journal of Banking & Finance, Elsevier, vol. 28(1), pages 85-105, January.
    14. Sweeney, Richard J, 1986. " Beating the Foreign Exchange Market," Journal of Finance, American Finance Association, vol. 41(1), pages 163-82, March.
    15. Levich, Richard M. & Thomas, Lee III, 1993. "The significance of technical trading-rule profits in the foreign exchange market: a bootstrap approach," Journal of International Money and Finance, Elsevier, vol. 12(5), pages 451-474, October.
    16. Engel, Charles & Hamilton, James D, 1990. "Long Swings in the Dollar: Are They in the Data and Do Markets Know It?," American Economic Review, American Economic Association, vol. 80(4), pages 689-713, September.
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    Cited by:
    1. Ülkü, Numan & Prodan, Eugeniu, 2013. "Drivers of technical trend-following rules' profitability in world stock markets," International Review of Financial Analysis, Elsevier, vol. 30(C), pages 214-229.

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