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Technical analysis and the profitability of U.S. foreign exchange intervention

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Abstract

This article reconciles an apparent contradiction found by recent research on U.S. intervention in foreign exchange markets. LeBaron (1996) and Szakmary and Mathur (1997) show that extrapolative technical trading rules trade against U.S. foreign exchange intervention and produce excess returns during intervention periods. Leahy (1995) shows that U.S. intervention itself is profitable over long periods of time. In other words, technical trades make excess returns when they take positions contrary to U.S. intervention - U.S. intervention itself is profitable, however. This article will first present recent research on these subjects. Then it will discuss how differing investment horizons and varying returns and position sizes may reconcile these facts.

Suggested Citation

  • Christopher J. Neely, 1998. "Technical analysis and the profitability of U.S. foreign exchange intervention," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 3-17.
  • Handle: RePEc:fip:fedlrv:y:1998:i:jul:p:3-17:n:v.80no.4
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    1. Sweeney, Richard J, 1986. "Beating the Foreign Exchange Market," Journal of Finance, American Finance Association, vol. 41(1), pages 163-182, March.
    2. Christopher J. Neely, 1997. "Technical analysis in the foreign exchange market: a layman's guide," Review, Federal Reserve Bank of St. Louis, issue Sep, pages 23-38.
    3. Owen F. Humpage, 1994. "Institutional aspects of U.S. intervention," Economic Review, Federal Reserve Bank of Cleveland, vol. 30(Q I), pages 2-19.
    4. Corrado, Charles J. & Taylor, Dean, 1986. "The cost of a central bank leaning against a random walk," Journal of International Money and Finance, Elsevier, vol. 5(3), pages 303-314, September.
    5. Szakmary, Andrew C. & Mathur, Ike, 1997. "Central bank intervention and trading rule profits in foreign exchange markets," Journal of International Money and Finance, Elsevier, vol. 16(4), pages 513-535, August.
    6. Leahy, Michael P, 1995. "The profitability of US intervention in the foreign exchange markets," Journal of International Money and Finance, Elsevier, vol. 14(6), pages 823-844, December.
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    Keywords

    Foreign exchange - Law and legislation;

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