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Technical analysis in foreign exchange markets: evidence from the EMS

  • F. FernAndez-RodrIguez
  • S. Sosvilla-Rivero
  • J. Andrada-FElix

This article assesses the economic significance of the non-linear predictability of EMS exchange rates. To that end, and using daily data for nine EMS currencies covering the 1 January 1978-31 December 1994 period, it considers nearest- neighbour non-linear predictors, transforming their forecasts into a technical trading rule, whose profitability has been evaluated against the traditional moving average trading rules, considering both interest rates and transaction costs. The results suggest that in most cases, a trading rule based on a non-linear predictor outperforms the moving average, both in terms of returns and in terms of the ideal profit and the Sharpe ratio profitability indicators.

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Article provided by Taylor & Francis Journals in its journal Applied Financial Economics.

Volume (Year): 13 (2003)
Issue (Month): 2 ()
Pages: 113-122

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Handle: RePEc:taf:apfiec:v:13:y:2003:i:2:p:113-122
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  6. Frankel, Jeffrey A & Froot, Kenneth A, 1987. "Using Survey Data to Test Standard Propositions Regarding Exchange Rate Expectations," American Economic Review, American Economic Association, vol. 77(1), pages 133-53, March.
  7. Neftci, Salih N, 1991. "Naive Trading Rules in Financial Markets and Wiener-Kolmogorov Prediction Theory: A Study of "Technical Analysis."," The Journal of Business, University of Chicago Press, vol. 64(4), pages 549-71, October.
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  19. Oliver LINTON, . "Applied nonparametric methods," Statistic und Oekonometrie 9312, Humboldt Universitaet Berlin.
  20. Taylor, Stephen J, 1992. "Rewards Available to Currency Futures Speculators: Compensation for Risk or Evidence of Inefficient Pricing?," The Economic Record, The Economic Society of Australia, vol. 0(0), pages 105-16, Supplemen.
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  23. Fernandez-Rodriguez, Fernando & Sosvilla-Rivero, Simon, 1998. "Testing nonlinear forecastability in time series: Theory and evidence from the EMS," Economics Letters, Elsevier, vol. 59(1), pages 49-63, April.
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