Working Paper: NBER ID: w3818
Authors: Richard M. Levich; Lee R. Thomas
Abstract: In this paper, we present new evidence on the profitability and statistical significance of technical trading rules in the foreign exchange market. We utilize a new data base, currency futures contracts for the period 1976-1990, and we implement a new testing procedure based on bootstrap methodology. Using this approach, we generate thousands of new exchange rate series constructed by random reordering of each original series. We then measure the profitability of the technical rules for each new series. The significance of the profits in the original series is assessed by comparison to the empirical distribution of results derived from the thousands of randomly generated series. Overall, our results suggest that simple technical trading rules have very often led to profits that are highly unusual. Splitting the entire 15-year sample period into three 5-year periods reveals that on average the profitability of some trading rules declined in the 1986-1990 period although profits remained positive (on average) and significant in many cases.
Keywords: technical trading rules; foreign exchange market; bootstrap methodology; market efficiency
JEL Codes: G14; F31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| application of technical trading rules (C58) | profits in the foreign exchange market (G15) |
| profits from mechanical trading rules (C69) | comparison to profits from randomly generated series (C59) |
| profits from mechanical trading rules (C69) | null hypothesis of market efficiency (G14) |
| decline in profitability from 1986 to 1990 (N12) | average profitability (L21) |