The Economic Value of Technical Trading Rules: A Nonparametric Utility-Based Approach

KULeuven, Center for Economic Studies, Working Paper No. DPS 02.03

32 Pages Posted: 19 Apr 2002

See all articles by Hans Dewachter

Hans Dewachter

Catholic University of Leuven (KUL) - Department of Economics; Erasmus Research Institute of Management (ERIM)

Marco Lyrio

Insper Institute of Education and Research

Date Written: March 13, 2002

Abstract

We adapt Brandt's (1999) nonparametric approach to determine the optimal portfolio choice of a risk averse foreign exchange investor who uses moving average trading signals as the information instrument for investment opportunities. Additionally, we assess the economic value of the estimated optimal trading rules based on the investor's preferences. The approach consists of a conditional generalized method of moments (GMM) applied to the conditional Euler optimality conditions. The method presents two main advantages: (i) it avoids ad hoc specifications of statistical models used to explain return predictability; and (ii) it implicitly incorporates all return moments in the investor's expected utility maximization problem. We apply the procedure to different moving average trading rules for the German mark-U.S. dollar exchange rate for the period 1973-2001. We find that technical trading rules are partially recovered and that the estimated optimal trading rules represent a significant economic value for the investor.

Keywords: Technical trading rules, exchange rates, nonparametric methods

JEL Classification: F31, G15

Suggested Citation

Dewachter, Hans and Lyrio, Marco, The Economic Value of Technical Trading Rules: A Nonparametric Utility-Based Approach (March 13, 2002). KULeuven, Center for Economic Studies, Working Paper No. DPS 02.03, Available at SSRN: https://ssrn.com/abstract=307759 or http://dx.doi.org/10.2139/ssrn.307759

Hans Dewachter (Contact Author)

Catholic University of Leuven (KUL) - Department of Economics ( email )

Center for Economic Studies
Naamsestraat 69
Leuven, B-3000
Belgium
+0032 16 326859 (Phone)
+0032 16 326796 (Fax)

Erasmus Research Institute of Management (ERIM)

P.O. Box 1738
3000 DR Rotterdam
Netherlands

Marco Lyrio

Insper Institute of Education and Research ( email )

R Quata 300
Sao Paulo, 04542-030
Brazil

HOME PAGE: http://www.insper.edu.br/en/faculty-and-research/marco-lyrio

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