IDEAS home Printed from
MyIDEAS: Login to save this paper or follow this series

Technical Analysis in Foreign Exchange Markets: Linear Versus Nonlinear Trading Rules

  • Fernando Fernández-Rodríguez
  • Simón Sosvilla-Rivero
  • Julián Andrada-Félix

In this paper we assess the economic significance of the nonlinear predictability of EMS exchange rates. To that end, and using daily data for nine EMS currencies covering the 1st January 1978- 31st December 1994 period, we consider nearest-neighbour nonlinear predictors, transforming their forecasts into a technical trading rule, whose profitability has been evaluated against the traditional (linear) moving average trading rules, considering both interest rates and transaction costs. Our results suggest that in most of the cases a trading rule based on a nonlinear predictor outperform the moving average, both in terms of returns and in terms of the ideal profit and the Sharpe ratio profitability indicators.

(This abstract was borrowed from another version of this item.)

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL:
Download Restriction: no

Paper provided by FEDEA in its series Working Papers on International Economics and Finance with number 00-02.

in new window

Date of creation:
Date of revision:
Handle: RePEc:fda:fdadef:00-02
Contact details of provider: Web page:

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. 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.
  2. Härdle, W.K., 1992. "Applied Nonparametric Methods," Discussion Paper 1992-6, Tilburg University, Center for Economic Research.
  3. Lee, Chun I. & Mathur, Ike, 1996. "Trading rule profits in european currency spot cross-rates," Journal of Banking & Finance, Elsevier, vol. 20(5), pages 949-962, June.
  4. Jensen, Michael C., 1978. "Some anomalous evidence regarding market efficiency," Journal of Financial Economics, Elsevier, vol. 6(2-3), pages 95-101.
  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. Blake LeBaron, . "Technical Trading Rule Profitability and Foreign Exchange Intervention," Working papers _002, University of Wisconsin - Madison.
  7. 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.
  8. Oliver LINTON, . "Applied nonparametric methods," Statistic und Oekonometrie 9312, Humboldt Universitaet Berlin.
  9. Charles Engel, 1995. "The Forward Discount Anomaly and the Risk Premium: A Survey of Recent Evidence," NBER Working Papers 5312, National Bureau of Economic Research, Inc.
  10. Sweeney, Richard J, 1986. " Beating the Foreign Exchange Market," Journal of Finance, American Finance Association, vol. 41(1), pages 163-82, March.
  11. Bryon Higgins, 1993. "Was the ERM crisis inevitable?," Economic Review, Federal Reserve Bank of Kansas City, issue Q IV, pages 27-40.
  12. Simon Sosvilla-Rivero & Fernando Fernandez-Rodriguez & Oscar Bajo-Rubio, 1999. "Exchange rate volatility in the EMS before and after the fall," Applied Economics Letters, Taylor & Francis Journals, vol. 6(11), pages 717-722.
  13. William F. Sharpe, 1965. "Mutual Fund Performance," The Journal of Business, University of Chicago Press, vol. 39, pages 119.
  14. Christopher J. Neely & Paul A. Weller, 2000. "Technical analysis and central bank intervention," Working Papers 1997-002, Federal Reserve Bank of St. Louis.
  15. Brock, W. & Lakonishok, J. & Lebaron, B., 1991. "Simple Technical Trading Rules And The Stochastic Properties Of Stock Returns," Working papers 90-22, Wisconsin Madison - Social Systems.
  16. Mizrach, B, 1992. "Multivariate Nearest-Neighbor Forecasts of EMS Exchange Rates," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 7(S), pages S151-63, Suppl. De.
  17. 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.
  18. Fernandez-Rodriguez, Fernando & Sosvilla-Rivero, Simon & Andrada-Felix, Julian, 1999. "Exchange-rate forecasts with simultaneous nearest-neighbour methods: evidence from the EMS," International Journal of Forecasting, Elsevier, vol. 15(4), pages 383-392, October.
  19. Carol L. Osler & P.H. Kevin Chang, 1995. "Head and shoulders: not just a flaky pattern," Staff Reports 4, Federal Reserve Bank of New York.
  20. Richard Meese & Kenneth S. Rogoff, 1981. "Empirical exchange rate models of the seventies: are any fit to survive?," International Finance Discussion Papers 184, Board of Governors of the Federal Reserve System (U.S.).
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:fda:fdadef:00-02. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Carmen Arias)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.