Working Paper: CEPR ID: DP10018
Authors: Pohsuan Hsu; Mark P. Taylor
Abstract: We carry out a large-scale investigation of technical trading rules in the foreign exchange market, using daily data over a maximum of forty years for thirty developed and emerging market currencies. Employing a stepwise test to safeguard against data-snooping bias and examining over 21,000 technical trading rules, we find evidence of substantial predictability in both developed and emerging markets, measured against a variety of returns and risk-adjusted performance metrics. We present time-series and cross-sectional variation in sub-periods and cultural and/or geographic groups, respectively, suggesting that temporarily not-fully-rational behavior and market immaturity lead to technical predictability and potential profitability.
Keywords: data-snooping bias; foreign exchange; technical analysis; trading rules
JEL Codes: C53; F31; G15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| technical trading rules (F14) | predictability of exchange rate movements (F31) |
| technical trading rules (F14) | profitability in foreign exchange market (G15) |
| market maturity (G10) | performance metrics of trading rules (C52) |
| trader behavior (G41) | performance metrics of trading rules (C52) |
| transaction costs (D23) | profitability of technical trading rules (G11) |
| market efficiency (G14) | effectiveness of technical trading rules (C52) |