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Do Technical Trading Profits Remain in the Foreign Exchange Market? Evidence from Fourteen CurrenciesIgor CialencoIllinois Institute of Technology Aris ProtopapadakisUniversity of Southern California - Marshall School of Business - Finance and Business Economics Department November 28, 2006 Marshall School of Business Working Paper No. 09-06 Abstract: We examine the in- and out-of-sample behavior of two popular trading systems, Alexander and Double MA filters, for fourteen developed-country currencies using daily data with bid-ask spreads. We find significant in-sample returns in the early periods. But out-of-sample returns are lower and only occasionally significant. We show that a currency risk factor proposed in the literature is systematically related to these returns. We find no support for the hypotheses that falling transactions costs are responsible for declining trading profits or for the Adaptive Market hypothesis. Importantly, we show that algorithms that simulate out-of-sample returns have serious instability difficulties.
Number of Pages in PDF File: 59 Keywords: trading rules, return rates, interest rate parity JEL Classification: F30, F31, F36, G12, G15, M21 working papers seriesDate posted: December 1, 2006 ; Last revised: October 24, 2010Suggested CitationContact Information
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