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Illusory Profitability of Technical Analysis in Emerging Foreign Exchange Markets

48 Pages Posted: 11 Apr 2010  

Pei Kuang

Goethe University Frankfurt - House of Finance

Michael Schröder

Centre for European Economic Research (ZEW) - International Finance and Financial Management

Qingwei Wang

Cardiff University - Cardiff Business School; Centre for European Economic Research (ZEW)

Date Written: April 8, 2010

Abstract

We conduct an extensive examination of profitability of technical analysis in ten emerging foreign exchange markets. Studying 25988 trading strategies, we find that best rules can sometimes generate an annually mean excess return of more than 30%. Based on standard tests, we find hundreds to thousands of seemingly significantly profitable strategies. Almost all these profits vanish once the data snooping bias is taken into account. We also show that out-of-sample test can have severe data snooping bias too. Overall, we find that the profitability of technical analysis in emerging foreign exchange markets is illusory.

Keywords: Foreign Exchange, Technical Trading, Data Snooping, Emerging Market

JEL Classification: C12, F31, G14, G15

Suggested Citation

Kuang, Pei and Schröder, Michael and Wang, Qingwei, Illusory Profitability of Technical Analysis in Emerging Foreign Exchange Markets (April 8, 2010). Available at SSRN: https://ssrn.com/abstract=1586278 or http://dx.doi.org/10.2139/ssrn.1586278

Pei Kuang

Goethe University Frankfurt - House of Finance ( email )

Grüneburgplatz 1
Frankfurt am Main, 60323
Germany

Michael Schröder

Centre for European Economic Research (ZEW) - International Finance and Financial Management ( email )

L 7,1
P.O. Box 10 34 43
D-68034 Mannheim
Germany
+49 621 1235 368 (Phone)
+49 621 1235 223 (Fax)

HOME PAGE: http://www.zew.de/en/team/msc/?cHash=c9507802336d8f7db96848c539ed2f89

Qingwei Wang (Contact Author)

Cardiff University - Cardiff Business School ( email )

Aberconway Building
Colum Drive
Cardiff, CF10 3EU
United Kingdom

Centre for European Economic Research (ZEW) ( email )

P.O. Box 10 34 43
L 7,1
D-68034 Mannheim, 68034
Germany

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