Do Technical Trading Profits Remain in the Foreign Exchange Market? Evidence from Fourteen Currencies
Illinois Institute of Technology
University of Southern California - Marshall School of Business - Finance and Business Economics Department
November 28, 2006
Marshall School of Business Working Paper No. 09-06
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
Date posted: December 1, 2006 ; Last revised: October 24, 2010
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