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Success and Failure of Technical Trading Strategies in the Cocoa Futures Market

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Author Info

  • Peter Boswijk

    ()
    (University of Amsterdam)

  • Gerwin Griffioen

    ()
    (University of Amsterdam)

  • Cars Hommes

    ()
    (University of Amsterdam)

Abstract

A large set of 5350 trend following technica! trading rules is applied to LIFFEand CSCE cocoa futures prices, and tothe Pound-Dollar exchange rate, in the period 1983:1-1997:6. We find that 72% ofthe trading rules generatespositive profits, even when correcting for transaction and borrowing costs, whenapplied to the LIFFE cocoa futuresprices. Moreover, a large set of trading rules exhibits statisticallysignificant forecasting power of the LIFFE cocoafutures series. On the other hand the same set of strategies performs poor onthe CSCE cocoa futures prices, withonly 18% generating positive net profits and hardly any statisticallysignificant forecasting power. The largedifference in the performance of technical trading may be attributed to acombination of the demand/supplymechanism in the cocoa market and an accident al influence of the Pound- Dollarexchange rate, reinforcing trendsin the LIFFE cocoa futures but weakening trends in the CSCE cocoa futures. Ourcase-study suggests a connectionbetween the succes or failure of technical trading and the relative magnitudesof trend and volatility of theunderlying series.

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Bibliographic Info

Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 01-016/1.

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Date of creation: 06 Feb 2001
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Handle: RePEc:dgr:uvatin:20010016

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Web page: http://www.tinbergen.nl

Related research

Keywords: technical trading strategies; commodity futures; exchange rate;

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Cited by:
  1. Carl Chiarella & Xue-Zhong He & Cars Hommes, 2004. "A Dynamic Analysis of Moving Average Rules," Research Paper Series 133, Quantitative Finance Research Centre, University of Technology, Sydney.
  2. Colin Fyfe & John Paul Marney & Heather Tarbert, 2005. "Risk adjusted returns from technical trading: a genetic programming approach," Applied Financial Economics, Taylor & Francis Journals, vol. 15(15), pages 1073-1077.

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