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The Significance of Technical Trading-Rule Profits in the Foreign Exchange Market: A Bootstrap Approach

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  • Richard M. Levich
  • Lee R. Thomas
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    Abstract

    In this paper, we present new evidence on the profitability and statistical significance of technical trading rules in the foreign exchange market. We utilize a new data base, currency futures contracts for the period 1976-1990, and we implement a new testing procedure based on bootstrap methodology. Using this approach, we generate thousands of new exchange rate series constructed by random reordering of each original series. We then measure the profitability of the technical rules for each new series. The significance of the profits in the original series is assessed by comparison to the empirical distribution of results derived from the thousands of randomly generated series. Overall, our results suggest that simple technical trading rules have very often led to profits that are highly unusual. Splitting the entire 15-year sample period into three 5-year periods reveals that on average the profitability of some trading rules declined in the 1986-1990 period although profits remained positive (on average) and significant in many cases.

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    File URL: http://www.nber.org/papers/w3818.pdf
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    Bibliographic Info

    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3818.

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    Date of creation: Aug 1991
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    Publication status: published as Journal of International Money and Finance, Vol. 12, no. 5, October 1993p. 451-474
    Handle: RePEc:nbr:nberwo:3818

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    1. Stephan Schulmeister, 1988. "Currency speculation and dollar fluctuations," Banca Nazionale del Lavoro Quarterly Review, Banca Nazionale del Lavoro, Banca Nazionale del Lavoro, vol. 41(167), pages 343-365.
    2. Brock, William & Lakonishok, Josef & LeBaron, Blake, 1992. " Simple Technical Trading Rules and the Stochastic Properties of Stock Returns," Journal of Finance, American Finance Association, American Finance Association, vol. 47(5), pages 1731-64, December.
    3. Samuelson, Paul A, 1976. "Is Real-World Price a Tale Told by the Idiot of Chance?," The Review of Economics and Statistics, MIT Press, vol. 58(1), pages 120-23, February.
    4. Froot, Kenneth A & Thaler, Richard H, 1990. "Foreign Exchange," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 4(3), pages 179-92, Summer.
    5. Branson, William H. & Henderson, Dale W., 1985. "The specification and influence of asset markets," Handbook of International Economics, Elsevier, in: R. W. Jones & P. B. Kenen (ed.), Handbook of International Economics, edition 1, volume 2, chapter 15, pages 749-805 Elsevier.
    6. Levich, Richard M., 1985. "Empirical studies of exchange rates: Price behavior, rate determination and market efficiency," Handbook of International Economics, Elsevier, in: R. W. Jones & P. B. Kenen (ed.), Handbook of International Economics, edition 1, volume 2, chapter 19, pages 979-1040 Elsevier.
    7. Cornell, W Bradford & Dietrich, J Kimball, 1978. "The Efficiency of the Market for Foreign Exchange under Floating Exchange Rates," The Review of Economics and Statistics, MIT Press, vol. 60(1), pages 111-20, February.
    8. 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, American Economic Association, vol. 80(4), pages 689-713, September.
    9. Black, Fischer, 1990. " Equilibrium Exchange Rate Hedging," Journal of Finance, American Finance Association, American Finance Association, vol. 45(3), pages 899-907, July.
    10. Levich, Richard M, 1989. "Is the Foreign Exchange Market Efficient?," Oxford Review of Economic Policy, Oxford University Press, Oxford University Press, vol. 5(3), pages 40-60, Autumn.
    11. Sweeney, Richard J, 1986. " Beating the Foreign Exchange Market," Journal of Finance, American Finance Association, American Finance Association, vol. 41(1), pages 163-82, March.
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    Cited by:
    1. Richard M. Levich & Lee R. Thomas, 1993. "Internationally Diversified Bond Portfolios: The Merits of Active Currency Risk Management," NBER Working Papers 4340, National Bureau of Economic Research, Inc.

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