The Economic Value of Technical Trading Rules: A Non-parametric Utility-based Approach
AbstractWe adapt Brandt's (1999) nonparametric approach to determine the optimal portfolio choice of a risk averse foreign exchange investor who uses moving average trading signals as the information instrument for investment opportunities. Additionally, we assess the economic value of the estimated optimal trading rules based on the investor's preferences. The approach consists of a conditional generalized method of moments (GMM) applied to the conditional Euler optimality conditions. The method presents two main advantages: (i) it avoids ad hoc specifications of statistical models used to explain return predictability; and (ii) it implicitly incorporates all return moments in the investor's expected utility maximization problem. We apply the procedure to different moving average trading rules for the German mark- U.S. dollar exchange rate for the period 1973-2001. We find that technical trading rules are partially recovered and that the estimated optimal trading rules represent a significant economic value for the investor.
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Bibliographic InfoPaper provided by Katholieke Universiteit Leuven, Centrum voor Economische Studiën, International Economics in its series International Economics Working Papers Series with number ces0203.
Length: 32 pages
Date of creation: Mar 2002
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Other versions of this item:
- Hans Dewachter & Marco Lyrio, 2005. "The economic value of technical trading rules: a nonparametric utility-based approach," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 10(1), pages 41-62.
- F31 - International Economics - - International Finance - - - Foreign Exchange
- G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
This paper has been announced in the following NEP Reports:
- NEP-ALL-2003-04-02 (All new papers)
- NEP-CFN-2003-04-02 (Corporate Finance)
- NEP-FIN-2003-04-02 (Finance)
- NEP-FMK-2003-04-02 (Financial Markets)
- NEP-IFN-2003-04-02 (International Finance)
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