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Technical Trading, Predictability and Learning in Currency Markets

45 Pages Posted: 28 Jan 2012 Last revised: 10 Sep 2013

Valerio Potì

University College Dublin

Richard M. Levich

New York University - Stern School of Business; National Bureau of Economic Research (NBER)

Pierpaolo Pattitoni

University of Bologna - Department of Management; University of Bologna - Rimini Center for Economic Analysis (RCEA)

Date Written: January 2012

Abstract

This paper studies predictability of currency returns over time and the extent to which it is captured by trading rules commonly used in currency markets. We consider the strategies that an investor endowed with rational expectations could have pursued to exploit out-of-sample currency predictability and generate abnormal returns. We find a close relation between these strategies and indices that track popular technical trading rules, namely moving average cross-over rules and the carry trade, implying that the technical rules represent heuristics by which professional market participants exploit currency mispricing. We find evidence that such mispricing reflects initially wrong investors’ beliefs (wrong priors), but information is efficiently processed as it becomes available. Predictability is highest in the mid ’90, subsequently decreases sharply, but increases again in the final part of the sample period, especially for the Euro and other emerging currencies.

Suggested Citation

Potì, Valerio and Levich, Richard M. and Pattitoni, Pierpaolo, Technical Trading, Predictability and Learning in Currency Markets (January 2012). NYU Working Paper No. 2451/31452. Available at SSRN: https://ssrn.com/abstract=1994317

Valerio Potì

University College Dublin ( email )

M. Smurfit School of Business
Carysfort Avenue, Blackrock
Dublin, Co Dublin
Ireland

Richard M. Levich (Contact Author)

New York University - Stern School of Business ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States
212-998-0422 (Phone)
212-995-4256 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Pierpaolo Pattitoni

University of Bologna - Department of Management ( email )

Via Capo di Lucca, 34
Bologna, 40126
Italy

University of Bologna - Rimini Center for Economic Analysis (RCEA) ( email )

Via Patara, 3
Rimini (RN), RN 47900
Italy

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