Technical Analysis in the Foreign Exchange Market: A Cointegration-Based Approach

26 Pages Posted: 17 Jul 2015

See all articles by Norbert Fiess

Norbert Fiess

Independent

Ronald MacDonald

University of Strathclyde in Glasgow - Department of Economics; Government of New Zealand - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: 1999

Abstract

Most technical analysis studies are concerned with the profitability of technical trading rules and almost all of them focus exclusively on trend-following patterns. In this paper we examine a different kind of technical indicator which suggests a structural relationship between High, Low, and Close prices of daily exchange rates. Since, for a given exchange rate, it can be shown that these prices have different time series properties, it is possible to explore the structural relationships between them using multivariate cointegration methods. This methodology facilitates the construction of dynamic structural econometric models, which are used to derive dynamic out-of-sample forecasts over different time horizons. Compared to standard benchmarks, it turns out that these models have extremely good forecasting properties, even when allowance has been made for transactions costs and risk premia.

Keywords: exchange rates forecasting; technical analysis

JEL Classification: F31, G12

Suggested Citation

Fiess, Norbert and MacDonald, Ronald R., Technical Analysis in the Foreign Exchange Market: A Cointegration-Based Approach (1999). Multinational Finance Journal, Vol. 3, No. 3, p. 147-172, 1999, Available at SSRN: https://ssrn.com/abstract=2631448

Ronald R. MacDonald

University of Strathclyde in Glasgow - Department of Economics ( email )

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Glasgow G4 0LN
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+44 141 548 3861 (Phone)

Government of New Zealand - Department of Economics

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P.O. Box 2498
Wellington
New Zealand

CESifo (Center for Economic Studies and Ifo Institute)

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Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

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