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Can abnormal returns be earned on bandwidth-bounded currencies? Evidence from a genetic algorithm

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  • Pedro Godinho

Abstract

Most of the studies about the Foreign Exchange market (Forex) analyse the behaviour of currencies that are allowed to float freely (or almost freely), but some currencies are still bounded by bandwidths (either disclosed or undisclosed). In this paper, I try to find out whether two bandwidth-bounded currencies, the Hong Kong dollar (HKD) and the Singapore dollar (SGD), present opportunities for abnormal returns. I consider a set of trading rules, and I use a genetic algorithm to optimise both the subset of rules to be used and their parameters, using real market data. I use four pairs of currencies, two of them involving currencies bounded by bandwidths and two others involving only free-floating currencies. I compare the results obtained for the different pairs, both in terms of profitability and in terms of the types of the rules that are used. Evidence of profitability is more consistent for the only pair including a bandwidth bounded currency without a narrow price band, the USD/SGD. Trend reversing rules are preferred for this currency pair, while the preferred type of rule seems to depend on the pair of currencies when free-floating currencies are considered. In the case of the SD/HKD, the small number of price changes, as well as the price stability (possibly consequences of a narrow price band) do not allow me to obtain conclusive results.

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File URL: http://www.economicissues.org.uk/Files/2012/112Godinho.pdf
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Bibliographic Info

Article provided by Economic Issues in its journal Economic Issues.

Volume (Year): 17 (2012)
Issue (Month): 1 (March)
Pages: 1-26

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Handle: RePEc:eis:articl:112godinho

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  1. Blake LeBaron, 1996. "Technical Trading Rule Profitability and Foreign Exchange Intervention," NBER Working Papers 5505, National Bureau of Economic Research, Inc.
  2. Fama, Eugene F, 1970. "Efficient Capital Markets: A Review of Theory and Empirical Work," Journal of Finance, American Finance Association, vol. 25(2), pages 383-417, May.
  3. Ryan Sullivan & Allan Timmermann & Halbert White, 1999. "Data-Snooping, Technical Trading Rule Performance, and the Bootstrap," Journal of Finance, American Finance Association, vol. 54(5), pages 1647-1691, October.
  4. Dittmar, Robert & Neely, Christopher J & Weller, Paul, 1996. "Is Technical Analysis in the Foreign Exchange Market Profitable? A Genetic Programming Approach," CEPR Discussion Papers 1480, C.E.P.R. Discussion Papers.
  5. Menkhoff, Lukas & Taylor, Mark P., 2006. "The Obstinate Passion of Foreign Exchange Professionals: Technical Analysis," Hannover Economic Papers (HEP) dp-352, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät.
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  7. Neely, Christopher J. & Weller, Paul A. & Ulrich, Joshua M., 2009. "The Adaptive Markets Hypothesis: Evidence from the Foreign Exchange Market," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 44(02), pages 467-488, April.
  8. 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.
  9. Christopher J. Neely & Paul A. Weller, 2001. "Intraday technical trading in the foreign exchange market," Working Papers 1999-016, Federal Reserve Bank of St. Louis.
  10. M. A. H. dempster & C. M. Jones, 2001. "A real-time adaptive trading system using genetic programming," Quantitative Finance, Taylor & Francis Journals, vol. 1(4), pages 397-413.
  11. 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.
  12. 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.
  13. Halbert White, 2000. "A Reality Check for Data Snooping," Econometrica, Econometric Society, vol. 68(5), pages 1097-1126, September.
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