have trading rule profits in the currency markets declined over time abstract previous studies have reported mixed results regarding the success of technical trading rules in currency markets abnormal returns were observed in many studies using data up to the mid 1980s while more recent studies generally report less success for technical trading rules this paper tests whether moving average trading rule profits have declined over the period from 1971 to 2000 if so previous profits may represent a temporary inefficiency that has since been eliminated in the currency markets the hypothesis is tested using 18 exchange rate series over a longer time period than in previous studies rules are optimized for successive 5 year in sample periods from 1971 to 1995 and tested over subsequent 5 year out of sample periods results show that risk adjusted trading rule profits have declined over time from an average of over 3 in the late 1970s and early 1980s to about zero in the 1990s thus market inefficiencies reported in previous studies may have been only temporary inefficiencies

modeling evaluation and methodology in the new century i what is changing it appears that any overt expression of interest in methodology is considered a clear sign of weak mindedness or premature senility l boland methodology entry in the new palgrave dictionary of economics as time passes one should expect the techniques and consequently the underlying methodology also to evolve this article will discuss some of the major changes in methodology since the middle of the last century to now among the major driving forces for this change is the growth in the amount of data available in most parts of economics together with the tremendous growth in the speed and storage ability of computers as well as the interactive aspects of the internet techniques or methodologies that were unthinkable or certainly unavailable 25 years ago are now standard and common a new mind set is required to limit dissension i will consider economics to be a decision science describing the decisions made by economic agents such as consumers employers investors and policy makers it follows that the purpose of any economic analysis will be to help actual decision makers make better decisions on average in a stochastic environment such an analysis can be thought of as a final good some analysis will be an intermediate good which helps another economist produce a better final good by taking these attitudes a pragmatic viewpoint can be taken in many situations and provide solutions to some questions as will be seen the many books and articles on economic methodology and philosophy in the past century consider many topics that were considered of considerable interest then but have since lost their importance for example a topic earlier viewed as being of some importance was is economics a science although i believe that it is no longer a hot topic around economics departments the answer to the question is that no one really cares however that may not be the correct response because if economics was classified as a science the discipline may be eligible for much larger research grants another major topic with a lasting impact was about whether a model needs an input of economic theory or not or equally can a satisfactory model be achieved just by introspection without any use of data i can recommend a very interesting short article on this topic titled methodenstreit or battle of the models by daniel fusfield in the new palgrave 1987 the battle was between carl menger and gustav schmoller starting in the 1880s with menger in favor of pure theory and schmoller wanting to use just an empirical approach unfortunately their initial debate became confused in a more political one with menger pushing laissez faire policies whereas schmoller supported interventionist government policy approaches essentially right versus left in today s terminology fusfield states that on the basic issue of the place of theory and empirical studies in economics menger and schmoller agreed that both were necessary they disagreed on the emphasis to be placed on each and their role in the development of conclusions menger correctly pointed out that a model based just on data is limited in generality because the data cover only some of the possible space it needs correct theory to go beyond the sample space he also said that data acted as a bridge between the principles of pure economics and the policy problems of applied economics in fact he warned against policy analysis without an empirical study schmoller was less generous to theorists finding the work too abstract irrelevant and based on assumptions that are unrealistic a later similar discussion took place between koopmans 1947 and burns and mitchell 1947 that influenced modeling into the 1960s and 1970s where do we stand 115 years later in this discussion in many ways it seems quite modern certainly compared to some of the remarks made around real business cycle theory a few years back

the speculative efficiency hypothesis the hypothesis that forward prices are the best unbiased forecast of future spot prices is often presented in the economic and financial analysis of futures markets this paper considers the hypothesis independently of its implications for rational expectations or market efficiency and in order to stress this fact the term speculative efficiency is used to characterize the state envisaged under the hypothesis if a market is subject to efficient speculation the supply of speculative funds is infinitely elastic at the forward price that is equal to the expected future spot price the expected future spot price is a market price determined as the solution to the underlying rational expectations macroeconomic model although the paper is primarily concerned with testing this hypothesis in the foreign exchange market the methodology introduced in the paper is of general application to all futures markets this abstract was borrowed from another version of this item

technical trading rules in the european monetary system abstract using genetic programming we find trading rules that generate significant excess returns for three of four ems exchange rates over the out of sample period 1986 1996 permitting the rules to use information about the interest rate differential proved to be important the reduction in volatility resulting from the imposition of a narrower band may reduce trading rule profitability our results cannot be duplicated by commonly used moving average rules filter rules or by two rules designed to exploit known features of target zone rates there is no evidence that the excess returns are compensation for bearing systematic risk

time varying risk and long term reversals a re examination of the international evidence long term reversals ltrs have been extensively documented as existing in international markets the predictability of returns opens the question whether investors should continue to diversify across international markets such predictability also has implications for the corporate decision of where and when to raise capital this paper re examines the international evidence for long term contrarian profits using a longer time horizon than all previous studies 81 years of data from 1925 to 2005 and finds that the long term contrarian anomaly disappears when time varying conditional alphas are considered this is true even without transaction costs for the marginal trader conservative transaction costs subsume ltr profits whether returns are risk adjusted or not this suggests that benefits from actual trades on ltrs do not negate a strategy based on diversification although time varying beta has been extensively documented as ineffective in describing ltrs this paper demonstrates that it is important to control for time variation in alpha a full conditional capital asset pricing model captures the ltr premium this suggests that macroeconomic factors are important for understanding ltrs and their associated risk

currency derivatives and exchange rate forecastability by incorporating new information generated by currency derivatives trading underlying exchange rates should be less forecastable than previously and the underlying currency markets should therefore be more efficient this hypothesis was tested for the first time for the period 1982 through 1997 on a clean sample of three major types of currency derivatives launched in two prominent markets various statistical tests indicate that following the introduction of the derivative contracts the underlying exchange rates became more random and the currencies involved tended thus to be priced more efficiently which supports the hypothesis

asymmetric over and undershooting of major exchange rates evidence from quantile regressions abstract this paper uses quantile regression techniques to investigate the temporal dependence patterns of major exchange rates around the globe specifically we estimate quantile autoregressive models for daily exchange rate returns of the usd eur usd jpy usd gbp usd aud usd chf and usd cad exchange rates between 1999 and 2014 testing for the equality of cross quantile effects we reveal substantial state dependence in the return dynamics in particular we find that large us dollar appreciations tend to exhibit positive dependence on past returns whereas large us dollar depreciations tend to exhibit negative dependence on past returns around central return quantiles however there is virtually no evidence for significant temporal dependence exceptions from this pattern are only apparent for the usd jpy and the usd chf exchange rate theoretically our results point to the presence of over and undershooting in terms of asymmetric exchange rate adjustment to previous day information

the temporal pattern of trading rule returns and exchange rate intervention intervention does not generate technical trading profits abstract this paper characterizes the temporal pattern of trading rule returns and official intervention for australian german swiss and u s data to investigate whether intervention generates technical trading rule profits the data reject the hypothesis that intervention generates inefficiencies from which technical rules profit in particular high frequency data show that abnormally high trading rule returns precede german swiss and u s intervention australian intervention precedes high trading rule returns but trading intervention patterns make it implausible that intervention actually generates those returns rather intervention responds to exchange rate trends from which trading rules have recently profited

do momentum based strategies still work in foreign currency markets this paper examines the performance of momentum trading strategies in foreign exchange markets we find the well documented profitability of momentum strategies during the 1970s and the 1980s has continued throughout the 1990s our approach and findings are insensitive to the specification of the trading rule and the base currency for analysis finally we show that the performance is not due to a time varying risk premium but rather depends on the underlying autocorrelation structure of the currency returns in sum the results lend further support to prior momentum studies on equities the profitability to momentum based strategies holds for currencies as well

the significance of technical trading rule profits in the foreign exchange market a bootstrap approach 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 our results suggest that simple technical trading rules have very often led to profits that are highly unusual splitting the entire sample period into three 5 year periods reveals that on average the profitability of some trading rules declined in the latest period although profits remained positive on average and significant in many cases jel f31 f47 g15

lessons from the evolution of foreign exchange trading strategies abstract the adaptive markets hypothesis posits that trading strategies evolve as traders adapt their behavior to changing circumstances this paper studies the evolution of trading strategies for a hypothetical trader who chooses portfolios from foreign exchange forex technical rules in major and emerging markets the carry trade and us equities the results show that a backtesting procedure to choose optimal portfolios improves upon the performance of nonadaptive rules we also find that forex trading alone dramatically outperforms the s p 500 with much larger sharpe ratios over the whole sample but there is little gain to coordinating forex and equity strategies which explains why practitioners consider these tools separately forex trading returns dip significantly in the 1990s but recover by the end of the decade and have been markedly superior to an equity position since 1998 overall trading rule returns still exist in forex markets with substantial stability in the types of rules though they have migrated to emerging markets to a considerable degree

beating the foreign exchange market filter rule profits found in foreign exchange markets in the early days of the current managed float persist in later periods as shown by statistical tests developed and implemented here the test is consistent with but independent of a wide variety of asset pricing models the profits found cannot be explained by risk if risk premia are constant over time inclusion of the home foreign interest rate differential in computing profits has little effect on the comparison of filter returns to those of buy and hold in the early years of the generalized managed floating that began in march 1973 filter rule profits in excess of buy and hold were found for many countries logue sweeney and willett 18 dooley and shafer 6 cornell and dietrich 5 it was unclear however whether such profits indicated inefficiencies first it was not clear that risk was adequately handled in such tests and often risk was ignored second there was no evidence such profits would be available postsample and third there was no statistical test of the significance of these profits this paper uses the logic of risk return tradeoffs to analyze the role of risk in such tests and illustrates the logic in a discussion using the sharpe lintner capital asset pricing model capm although a breeden consumption based capm a merton intertemporal capm or an arbitrage pricing model apm could easily be used the paper develops a test of statistical significance appropriate to foreign exchange markets section i analyzing the rate of return on foreign exchange speculation less the foreign domestic interest rate differential the test explicitly assumes that risk premia are constant over the sample the excess rates of return observable in using filters in going from a risk free dollar asset to a risk free deutsche mark dm asset persist into the 1980 s section ii and this is true even when taking account of transactions costs it turns out that these results for the dm case do not depend very much on the interestrate differential but primarily on exchange rate behavior this is useful to know because it is often quite difficult to find matching interest rate data of high quality for a sample of nine other currencies using only exchange rates section iii shows that the excess returns made in the first 610 days of the float persist in the next 1 220 days into the 1980 s dooley and shafer 7 find similar persistence in experiments that do not use buy and hold and have no significance tests when filter rule profits have been found in spot exchange markets it has often been argued that the profits are due to risk this paper uses the capm to analyze rates of return both to buy and hold and to filter strategies it turns out that the claremont mckenna college and claremont graduate school arthur d warga douglas joines and thomas d willett offered helpful comments and ning ning koo provided research assistance

technical analysis and the effectiveness of central bank intervention abstract using daily data on foreign exchange interventions of both the bundesbank and the fed we provide further evidence that central banks earn profits with interventions and that technical trading rules are unusually profitable on days on which interventions take place we argue that what lies at the root of these seemingly contradictory results is that a intervention profits and trading rule profitability are measured over different horizons and b after interventions exchange rates tend to move contrary to central banks intentions in the short run but in agreement with their intentions in the long run

the use of technical analysis in the foreign exchange market abstract technica or chartist analysis of financial markets involves providing forecasts or trading advice on the basis of largely visual inspection of past prices without regard to any underlying economic or fundamental analysis this paper reports the results of a questionnaire survey conducted on behalf of the bank of england among chief foreign exchange dealers based in london in november 1988 amongst other findings it is revealed that at least 90 per cent of respondents place some weight on this form of non fundamental analysis when forming views at one or more time horizons there is also a skew towards reliance on technical as opposed to fundamentalist analysis at shorter horizons which becomes steadily reversed as the length of horizon considered is increased a very high proportion of chief dealers view technical and fundamental analysis as complementary forms of analysis and a substantial proportion suggest that technical advice may be self fulfilling jel f31

the cost of a central bank leaning against a random walk abstract using a stochastic model we show that a central bank is expected to suffer a loss when it temporarily affects the exchange rate by sterilized intervention against a random walk we also demonstrate that the methodology used in several studies of the profitability of official central bank intervention biases their results towards finding positive profits this bias created by only observing periods where cumulative intervention sums to zero accounts for the seemingly contradictory empirical results of several intervention profitability studies

do professional currency managers beat the benchmark investigation of an index of returns on professionally managed currency funds and a subset of returns from 34 individual currency fund managers finds that over the 1990 2006 period currency fund m

optimal tax schemes and the environmental externality abstract this paper analyzes optimal tax schemes in an overlapping generations model with the environment which deteriorated by the consumption to achieve the optimal allocation two sorts of consumption tax schemes are analyzed in addition we examine another tax scheme with the maintenance subsidy

central bank intervention and trading rule profits in foreign exchange markets abstract moving average trading rules are utilized in both futures and spot foreign currency markets to show that significant positive profits can be earned in four of five currencies examined the results are consistent for both in sample and forward simulation tests regression results demonstrate that central bank intervention is strongly associated with the profitability of trading returns for the three major currencies dm yen and pound and partially explains returns for the sf and cd consistent with conjectures in previous studies that news concerning intervention tends to be revealed over weekends we find that moving average trading rule returns are significantly positive on fridays and mondays and not significantly different from zero in the middle of the week

weak form efficiency in currency markets many past studies have found that currencies trend so technical trading rules produced statistically and economically significant profits in other words foreign exchange markets were weak form inefficient the study reported here reexamined this phenomenon with use of a new database of currency futures for 1975 2006 that includes old and newly liquid currencies the findings from the recent data are contradictory the profitability of trend following eroded for major currencies and their associated cross exchange rates around the mid 1990s newly liquid currencies after 2000 do trend however just as major currencies did in earlier years the evidence is consistent with early weak form inefficiency followed by vanishing trends as traders learn and adapt their strategies

information shares in the us treasury market abstract this paper highlights the previously neglected role of the futures markets in us treasury price discovery the estimates of 5 and 10 year govpx spot market information shares typically fail to reach 50 from 1999 on the govpx information shares for the 2 year contract are higher than those of the 5 and 10 year maturities but also decline after 1998 relative bid ask spreads number of trades and realized volatility are statistically significant and explain up to 21 of daily information shares in roughly 1 4 of cases when public information is released the futures market gains information share but macroeconomic announcements rarely explain information shares independently of liquidity

the adaptive markets hypothesis evidence from the foreign exchange market we analyze the intertemporal stability of excess returns to technical trading rules in the foreign exchange market by conducting true out of sample tests on previously studied rules the excess returns of the 1970s and 1980s were genuine and not just the result of data mining but these profit opportunities had disappeared by the early 1990s for filter and moving average rules returns to less studied rules also have declined but have probably not completely disappeared high volatility prevents precise estimation of mean returns these regularities are consistent with the adaptive markets hypothesis lo 2004 but not with the efficient markets hypothesis

is technical analysis in the foreign exchange market profitable a genetic programming approach using genetic programming techniques to find technical trading rules we find strong evidence of economically significant out of sample excess returns to those rules for each of six exchange rates over the period 1981 1995 further when the dollar deutsche mark rules are allowed to determine trades in the other markets there is significant improvement in performance in all cases except for the deutsche mark yen betas calculated for the returns according to various benchmark portfolios provide no evidence that the returns to these rules are compensation for bearing systematic risk bootstrapping results on the dollar deutsche mark indicate that the trading rules detect patterns in the data that are not captured by standard statistical models

what do retail fx traders learn what is the benefit of experience using data from a leading trading platform we find no evidence that retail fx traders learn to trade better but they do appear to learn about their innate abilities as traders and respond appropriately in particular following an unsuccessful trading day they are more likely to cease trading to trade smaller amounts and to trade less frequently these effects are stronger for younger and less experienced traders who might be expected to have more to learn than older more experienced traders as regards learning through experience surprisingly we find that more seasoned traders demonstrate a slight decline in performance once we account for the endogenous decision to cease trading and even very experienced traders consistently lose money