The Cost of Technical Trading Rules in the Forex Market: A Utility-Based Evaluation

19 Pages Posted: 24 May 2006

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: June 19, 2003

Abstract

We compute the opportunity cost for rational risk averse agents of using technical trading rules in the foreign exchange rate market. Our purpose is to investigate whether these rules can be interpreted as near-rational investment strategies for rational investors. We analyze four different exchange rates and find that the opportunity cost of using chartist rules tends to be prohibitively high. We also present a method to decompose this opportunity cost into parts related to investor's irrationality and misallocation of wealth. The results show that irrationality of chartist beliefs is an important component of the total opportunity cost of using technical trading rules.

Keywords: technical trading rule, exchange rate

JEL Classification: M, M41, G3, F31, G15

Suggested Citation

Dewachter, Hans and Lyrio, Marco, The Cost of Technical Trading Rules in the Forex Market: A Utility-Based Evaluation (June 19, 2003). ERIM Report Series Reference No. ERS-2003-052-F&A, Available at SSRN: https://ssrn.com/abstract=423662

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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