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Do Moving Average Trading Rule Results Imply Nonlinearities in Foreign Exchange?

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This paper tests whether fitted linear models can replicate results from moment tests inspired by moving average technical trading rules for weekly foreign exchange series. Estimation is performed using standard OLS and maximum likelihood methods, along with a simulated method of moments technique which incorporates the trading rule moments into the estimation procedure. Results show that linear models are capable of replicating the trading rule moments along with the small autocorrelations observed in these series. This result holds for parameter values estimated using SMM and GARCH disturbances, but not for parameters estimated using maximum likelihood. The estimated models are simulated to examine the amount of predictability over long horizons.

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Paper provided by University of Wisconsin - Madison in its series Working papers with number _005.

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Handle: RePEc:wop:wimahp:_005
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