Random Walk Currency Futures Profits Revisited
International Journal of Managerial Finance, Vol. 3, No. 3, pp. 263-286, 2007
Posted: 16 Jan 2009
Date Written: January, 13 2009
Recent research indicates that the Random Walk Hypothesis (RWH) approximately describes the behavior of major dollar exchange rates during the post-1973 float. The present analysis examines the profitability of currency futures trading rules that assume that spot exchange rates can be adequately modeled as driftless random walks. Two random walk currency futures trading rules are simulated over all available data from the period 1984-2003. In both cases, the investor buys currencies selling at a discount and sells those selling at a premium, as the RWH implies. The two rules differ only in the way they allocate the hypothetical investor's resources among long and short foreign currency positions. Results show that an investor who used these trading strategies over the past decade would have enjoyed large cumulative gains, although periods of profit were interrupted by periods of substantial loss. The findings encourage the hope that profitable random-walk-based strategies for currency futures trading can be devised.
Keywords: Random processes, Futures markets, Currency options
JEL Classification: G1
Suggested Citation: Suggested Citation