Technical Analysis and Central Bank Intervention
FRB of St. Louis Working Paper No. 97-002C
33 Pages Posted: 25 Sep 2000
Date Written: February 2000
This paper extends the genetic programming techniques developed in Neely, Weller and Dittmar (1997) to provide some evidence that information about U.S. foreign exchange intervention can improve technical trading rules' profitability for two of four exchange rates over part of the out-of-sample period. Rules tend to take positions contrary to official intervention and are unusually profitable on days prior to intervention, indicating that intervention is intended to check or reverse predictable trends. Intervention seems to be more successful in checking predictable trends in the out-of-sample (1981-1998) period than in the in-sample (1975-1980) period. We conjecture that instability in the intervention process prevents more consistent improvement in the excess returns to rules. We find that the improvement in performance results from more precise estimation of the information in the past exchange rate series, rather than from information about contemporaneous intervention.
Keywords: Technical trading rules, genetic programming, exchange rates, central bank intervention
JEL Classification: F31, G15
Suggested Citation: Suggested Citation