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Technical Trading Rules and Regime Shifts in Foreign Exchange

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  • Blake LeBaron

    ()
    (University of Wisconsin - Madison)

Abstract

This paper performs tests on several different foreign exchange series using a methodology inspired by technical trading rules. Moving average based rules are used as specification tests on the process for foreign exchange rates. Several models for regime shifts and persistent trends are simulated and compared with results from the actual series. The results show that these simple models can not capture some aspects of the series studied. Finally, the economic significance of the trading rule results are tested. Returns distributions from the trading rules are compared with returns on risk free assets and returns from the U.S. stock market.

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Paper provided by University of Wisconsin - Madison in its series Working papers with number _007.

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Handle: RePEc:wop:wimahp:_007

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  1. Tim Bollerslev, 1986. "Generalized autoregressive conditional heteroskedasticity," EERI Research Paper Series EERI RP 1986/01, Economics and Econometrics Research Institute (EERI), Brussels.
  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, vol. 47(5), pages 1731-64, December.
  3. Lee, Bong-Soo & Ingram, Beth Fisher, 1991. "Simulation estimation of time-series models," Journal of Econometrics, Elsevier, vol. 47(2-3), pages 197-205, February.
  4. Pakes, Ariel & Pollard, David, 1989. "Simulation and the Asymptotics of Optimization Estimators," Econometrica, Econometric Society, vol. 57(5), pages 1027-57, September.
  5. Daniel McFadden, 1987. "A Method of Simulated Moments for Estimation of Discrete Response Models Without Numerical Integration," Working papers 464, Massachusetts Institute of Technology (MIT), Department of Economics.
  6. Kathryn M. Dominguez, 1986. "Are foreign exchange forecasts rational? New evidence from survey data," International Finance Discussion Papers 281, Board of Governors of the Federal Reserve System (U.S.).
  7. 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.
  8. repec:att:wimass:9105 is not listed on IDEAS
  9. Meese, Richard A. & Rogoff, Kenneth, 1983. "Empirical exchange rate models of the seventies : Do they fit out of sample?," Journal of International Economics, Elsevier, vol. 14(1-2), pages 3-24, February.
  10. Sweeney, Richard J, 1986. " Beating the Foreign Exchange Market," Journal of Finance, American Finance Association, vol. 41(1), pages 163-82, March.
  11. Francis X. Diebold & James M. Nason, 1989. "Nonparametric exchange rate prediction?," Finance and Economics Discussion Series 81, Board of Governors of the Federal Reserve System (U.S.).
  12. Goodhart, Charles, 1988. "The Foreign Exchange Market: A Random Walk with a Dragging Anchor," Economica, London School of Economics and Political Science, vol. 55(220), pages 437-60, November.
  13. Meese, Richard A & Rose, Andrew K, 1990. "Nonlinear, Nonparametric, Nonessential Exchange Rate Estimation," American Economic Review, American Economic Association, vol. 80(2), pages 192-96, May.
  14. LeBaron, Blake, 1992. "Forecast Improvements Using a Volatility Index," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 7(S), pages S137-49, Suppl. De.
  15. Pagan, Adrian R. & Schwert, G. William, 1990. "Alternative models for conditional stock volatility," Journal of Econometrics, Elsevier, vol. 45(1-2), pages 267-290.
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  17. Engle, Robert F, 1982. "Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation," Econometrica, Econometric Society, vol. 50(4), pages 987-1007, July.
  18. Harvey, Andrew & Ruiz, Esther & Sentana, Enrique, 1992. "Unobserved component time series models with Arch disturbances," Journal of Econometrics, Elsevier, vol. 52(1-2), pages 129-157.
  19. Rothschild, Michael & Stiglitz, Joseph E., 1970. "Increasing risk: I. A definition," Journal of Economic Theory, Elsevier, vol. 2(3), pages 225-243, September.
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Citations

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Cited by:
  1. Bill Cai & Charlie Cai & Kevin Keasey, 2005. "Market Efficiency and Returns to Simple Technical Trading Rules: Further Evidence from U.S., U.K., Asian and Chinese Stock Markets," Asia-Pacific Financial Markets, Springer, vol. 12(1), pages 45-60, March.
  2. LeBaron, B., 1996. "Technical Trading Rule Profitability and Foreing Exchange Intervention," Working papers 9445r, Wisconsin Madison - Social Systems.
  3. Spyros Skouras, 1998. "Financial Returns and Efficiency as seen by an Artificial Technical Analyst," Finance 9808001, EconWPA, revised 24 Aug 1998.
  4. P. Lequeux & E. Acar, 1998. "A dynamic index for managed currencies funds using CME currency contracts," The European Journal of Finance, Taylor & Francis Journals, vol. 4(4), pages 311-330.
  5. 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.
  6. Alessandro Beber, 1999. "Il dibattito su dignità ed efficacia dell'analisi tecnica nell'economia finanziaria," Alea Tech Reports 003, Department of Computer and Management Sciences, University of Trento, Italy, revised 14 Jun 2008.
  7. Jing Yang, 1999. "Heterogeneous Beliefs, Intelligent Agents, and Allocative Efficiency in an Artificial Stock Market," Computing in Economics and Finance 1999 612, Society for Computational Economics.
  8. Ronald J. Balvers & Yangru Wu, 2005. "Optimal Transaction Filters Under Transitory Trading Opportunities: Theory and Empirical Illustration," Working Papers 022005, Hong Kong Institute for Monetary Research.
  9. Saacke, Peter, 2002. "Technical analysis and the effectiveness of central bank intervention," Journal of International Money and Finance, Elsevier, vol. 21(4), pages 459-479, August.
  10. Shareen Joshi & Jeffrey Parker & Mark A. Bedau, 1998. "Technical Trading Creates a Prisoner's Dilemma: Results from an Agent-Based Model," Research in Economics 98-12-115e, Santa Fe Institute.
  11. Emmanuel Acar & Stephen Satchell, 1997. "A theoretical analysis of trading rules: an application to the moving average case with Markovian returns," Applied Mathematical Finance, Taylor & Francis Journals, vol. 4(3), pages 165-180.
  12. Hans Dewachter, 1997. "Sign predictions of exchange rate changes: Charts as proxies for Bayesian inferences," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 133(1), pages 39-55, March.
  13. Canova, Fabio & Marrinan, Jane, 1995. "Predicting excess returns in financial markets," European Economic Review, Elsevier, vol. 39(1), pages 35-69, January.
  14. Gencay, Ramazan, 1999. "Linear, non-linear and essential foreign exchange rate prediction with simple technical trading rules," Journal of International Economics, Elsevier, vol. 47(1), pages 91-107, February.
  15. Bernd Lucke, 2003. "Are technical trading rules profitable? Evidence for head-and-shoulder rules," Applied Economics, Taylor & Francis Journals, vol. 35(1), pages 33-40.
  16. Blake LeBaron, 1994. "Chaos and Nonlinear Forecastability in Economics and Finance," Finance 9411001, EconWPA.

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