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## Technical trading-rule profitability, data snooping, and the reality check: evidence from the foreign exchange market’, forthcoming (2006)

Venue: | Journal of Money, Credit and Banking |

Citations: | 23 - 2 self |

### Citations

852 | Empirical Exchange Rate Models of the Seventies: Do They Fit out of Sample?” - Meese, Rogoff - 1983 |

367 | Simple technical trading rules and the stochastic properties of stock returns
- Brock, Lakonishok, et al.
- 1992
(Show Context)
Citation Context ...ether the profitability of mechanical trading rules will be significant out of sample. In practice, a researcher can examine many trading rules for a given data set and there is a high probability that one such rule will yield superior performance ex post even if it does not provide any useful economic signal ex ante. In other words, there is a possibility that any superior results obtained may be due to pure luck rather than due to any merit of the trading rules designed. This is the so-called data-snooping problem, whose importance has been recognized by researchers in finance. For example, Brock et al. (1992) apply 26 technical trading rules to 90 years of daily data for the Dow Jones Industrial Average index and find that these rules are capable of outperforming a benchmark of holding cash. Using bootstrap method, they show that the returns obtained from the trading strategies are inconsistent with any of the null models that they explored. However, as they examine many rules which are not independent, their method does not provide a comprehensive test across all rules. In a recent paper, White (2000) develops a novel procedure, called Reality Check, which takes care of datasnooping biases and th... |

361 |
The Stationary Bootstrap
- Politis, Romano
- 1994
(Show Context)
Citation Context ... when the benchmark is “always neural,” tktk rf ,, = . (4) When assessing whether there exists a superior rule, the null hypothesis to be tested is that the performance of the best rule is no better than the benchmark, i.e., 0)}({max: ,...,1 0 ≤= kLk fEH , (5) where the expectation is evaluated with the simple arithmetic average ∑= = − T Pt tkk fNf , 1 . Rejection of this null hypothesis will lead to the conclusion that the best trading rule achieves performance superior to the benchmark. White (2000) shows that this null hypothesis can be tested by applying the stationary bootstrap method of Politis and Romano (1994) to the observed values of tkf , . The procedure is implemented in the following steps. Step 1, for each trading rule k, we resample the realized 10 excess return series tkf , , one observation at a time with replacement, and denote the resulting series by *,tkf . This process is repeated B times. Step 2, for each replication i, we compute the sample average of the bootstrapped returns, denoted by .,...,1,*, 1* , BifNf T Pt tkik =≡ ∑ = − Step 3, we construct the following statistics: )},({max ,...1 k Lk fNV = = (6) BiffNV kik Lk i ,...,1)},({max * , ,...,1 * =−= = . (7) Step 4, White’s Reality... |

329 | Exchange rates and fundamentals: Evidence on long-horizon predictability. - Mark - 1995 |

308 |
Asymptotic inference about predictive ability
- West
- 1996
(Show Context)
Citation Context ...ed parameters, and X is a vector of observed dependent and predicting variables that satisfy certain regularity conditions.2 In this study, there is no parameter to be estimated. The performance measures are calculated from returns generated by trading rules ( Lkk ,...,1 , =θ ). Our full sample of daily exchange rates starts on April 2, 1973 and ends on December 31, 1998, with a total of 6463 observations for each currency studied. The first trading signal is generated for the 256th observation for all trading rule specifications because some rules require 2 See Diebold and Mariano (1995) and West (1996) for details on the regularity conditions. 8 255 days of previous data in order to provide a trading signal. Therefore, P is 256, T is 6463, and N is 6208. We investigate 69 filter rules, 858 moving average rules, 560 trading range break rules, and 640 channel breakout rules. Thus the total number of trading rules (L) is 2127. Sweeney (1986) shows that the excess returns from filter rules are primarily dependent on exchange rate variations, and not much on interest-rate differentials. Since it is difficult to obtain high-quality daily interest rate data, following the general practice in the l... |

216 | Nonstationarity and level shifts with an application to purchasing power parity - Perron, Vogelsang - 1992 |

200 | Is technical analysis in the foreign exchange market profitable? A genetic programming approach,
- Neely, Weller, et al.
- 1997
(Show Context)
Citation Context ...ollerslev (1989, 1994), Diebold, Gardeazabal and Yilmaz (1994), and Mark (1995). In contrast to the literature on technical analysis with high-frequency data, these researchers employ lower-frequency data (monthly or quarterly) and find that exchange rates are in general unforecastable at the 1 to 12 months horizons. 2 significantly profitable. Kho (1996) also reports profitability of moving averages rules in currency markets and demonstrates that part of excess returns can be accounted for by a timevarying risk premium. Other studies in this area include Gencay (1999), Lee and Mathur (1996), Neely et al. (1997), Taylor (1994), and Sweeney (1988). It is unclear, however, whether the profitability of mechanical trading rules will be significant out of sample. In practice, a researcher can examine many trading rules for a given data set and there is a high probability that one such rule will yield superior performance ex post even if it does not provide any useful economic signal ex ante. In other words, there is a possibility that any superior results obtained may be due to pure luck rather than due to any merit of the trading rules designed. This is the so-called data-snooping problem, whose importan... |

194 |
The Use of Technical Analysis in the Foreign Exchange Market.
- Taylor, Allen
- 1992
(Show Context)
Citation Context ...ading-rule profitability in the foreign exchange market. The main empirical results are reported in Section III. Section IV carries out various checks for the robustness of results. Concluding remarks are contained in the final section. I. Technical Trading Rules Technical trading rules have been extremely popular tools used by traders in financial markets for many decades and the study on their performance has been a subject of extensive research. For applications of technical trading rules in the foreign exchange market, in a survey of major foreign exchange dealers based in London in 1990, Taylor and Allen (1992) report that at least 90 percent of the respondents place some weight on technical analysis when forecasting currency prices, particularly for short horizons. In order to obtain meaningful estimate of datasnooping biases, we must provide a comprehensive coverage of the trading rules in use. In this study, we consider four popular types of trading rules, which are described below. For each type, we experiment with numerous parameterizations. The notations and specific parameter values used in our experiments are spelled out in the Appendix. In each case, we assume that the speculator initially ... |

178 | A Reality Check for Data Snooping
- White
(Show Context)
Citation Context ...ing problem, whose importance has been recognized by researchers in finance. For example, Brock et al. (1992) apply 26 technical trading rules to 90 years of daily data for the Dow Jones Industrial Average index and find that these rules are capable of outperforming a benchmark of holding cash. Using bootstrap method, they show that the returns obtained from the trading strategies are inconsistent with any of the null models that they explored. However, as they examine many rules which are not independent, their method does not provide a comprehensive test across all rules. In a recent paper, White (2000) develops a novel procedure, called Reality Check, which takes care of datasnooping biases and thereby permits computation of such a test. The idea of the White procedure is to generate the empirical distribution from the full set of models (in our case, trading strategies) that lead to the best-performing trading strategy and to draw inference from this distribution for certain performance measures. Sullivan et al. (1999) apply White’s Reality Check methodology to the Brock et al. (1992) data set, and find that certain trading rules indeed outperform the benchmark. However, after adjusting fo... |

153 | Was it real? the exchange rate - interest differential over the modern floating rate period, - Meese, Rogoff - 1988 |

124 | Data-snooping, technical trading rule performance and the bootstrap.
- Sullivan, Timmermann, et al.
- 1999
(Show Context)
Citation Context ... null models that they explored. However, as they examine many rules which are not independent, their method does not provide a comprehensive test across all rules. In a recent paper, White (2000) develops a novel procedure, called Reality Check, which takes care of datasnooping biases and thereby permits computation of such a test. The idea of the White procedure is to generate the empirical distribution from the full set of models (in our case, trading strategies) that lead to the best-performing trading strategy and to draw inference from this distribution for certain performance measures. Sullivan et al. (1999) apply White’s Reality Check methodology to the Brock et al. (1992) data set, and find that certain trading rules indeed outperform the benchmark. However, after adjusting for data-snooping biases, there is 3 insufficient evidence that technical trading strategies are of any economic value for predicting the U.S. stock market returns for the most recent 10-year period. The purpose of this paper is to study the profitability of numerous technical trading rules in the foreign exchange market and to examine the biases due to data snooping. Our paper is the first study to formally investigate the ... |

119 |
Common stochastic trends in a system of exchange rates.
- Baillie, Bollerslev
- 1989
(Show Context)
Citation Context ...ark exchange rate and finds significant profitability of these rules. He also shows that filter rule profits cannot be easily explained by risk. Levich and Thomas (1993) examine the profitability of filter rules and moving average rules using futures prices for five currencies. Using a bootstrap re-sampling method to evaluate the statistical significance of their results, they report that some rules may be 1 A complementary literature studies the forecasting accuracy of exchange rates using either fundamental analysis or time-series techniques. See, for example, Meese and Rogoff (1983, 1988), Baillie and Bollerslev (1989, 1994), Diebold, Gardeazabal and Yilmaz (1994), and Mark (1995). In contrast to the literature on technical analysis with high-frequency data, these researchers employ lower-frequency data (monthly or quarterly) and find that exchange rates are in general unforecastable at the 1 to 12 months horizons. 2 significantly profitable. Kho (1996) also reports profitability of moving averages rules in currency markets and demonstrates that part of excess returns can be accounted for by a timevarying risk premium. Other studies in this area include Gencay (1999), Lee and Mathur (1996), Neely et al. (1... |

111 | Technical Trading Rule Profitability of Foreign Exchange Intervention"
- LeBaron
- 1999
(Show Context)
Citation Context ...much less pronounced in the second part of the sample than in the first part. Furthermore, an out-of-sample test indicates that the null hypothesis can be rejected at the five percent level for only two currencies. These results suggest that exchange rate series may have undergone structural changes over time, and the FX market has become increasingly more efficient. Our analyses for cross exchange rates produce similar results and confirm the robustness of our basic findings. Several researchers have attempted to explain why technical rules are profitable in terms of their economic contents. LeBaron (1999) claims that much exchange rate predictability is due to central bank intervention. Neely and Weller (2001) and Neely (2002) show that trading rule returns precede central bank interventions. Intervention does not create market inefficiency from which technical rules profit. But rather, intervention is intended to halt predictable trends from which trading rules have profited. Sapp (2004) finds that both profitability and market uncertainty increase preceding central bank intervention and remain high during intervention. He demonstrates that a time-varying risk premium may play a possible role... |

110 |
Beating the foreign exchange market",
- Sweeney
- 1986
(Show Context)
Citation Context ...volume data and are guided by mechanical algorithms, should not be able to beat the market. This suggests a simple and robust test for the weak form efficient market hypothesis. Hence, a researcher can apply numerous rules to a given data set and a finding of significant profitability of a technical trading rule is often interpreted as evidence of violation of the weak form market efficiency. Cornell and Dietrich (1978) are the first to document large profits of filter rules and moving average rules for the Dutch guilder, the Deutsche mark and the Swiss franc using the post-Bretton Wood data. Sweeney (1986) applies simple filter rules to the dollar-Deutsche mark exchange rate and finds significant profitability of these rules. He also shows that filter rule profits cannot be easily explained by risk. Levich and Thomas (1993) examine the profitability of filter rules and moving average rules using futures prices for five currencies. Using a bootstrap re-sampling method to evaluate the statistical significance of their results, they report that some rules may be 1 A complementary literature studies the forecasting accuracy of exchange rates using either fundamental analysis or time-series techniqu... |

101 | The Significance of Technical Trading-Rule Profits in the Foreign Exchange Market: A Bootstrap Approach.
- Levich, Thomas
- 1993
(Show Context)
Citation Context ...rous rules to a given data set and a finding of significant profitability of a technical trading rule is often interpreted as evidence of violation of the weak form market efficiency. Cornell and Dietrich (1978) are the first to document large profits of filter rules and moving average rules for the Dutch guilder, the Deutsche mark and the Swiss franc using the post-Bretton Wood data. Sweeney (1986) applies simple filter rules to the dollar-Deutsche mark exchange rate and finds significant profitability of these rules. He also shows that filter rule profits cannot be easily explained by risk. Levich and Thomas (1993) examine the profitability of filter rules and moving average rules using futures prices for five currencies. Using a bootstrap re-sampling method to evaluate the statistical significance of their results, they report that some rules may be 1 A complementary literature studies the forecasting accuracy of exchange rates using either fundamental analysis or time-series techniques. See, for example, Meese and Rogoff (1983, 1988), Baillie and Bollerslev (1989, 1994), Diebold, Gardeazabal and Yilmaz (1994), and Mark (1995). In contrast to the literature on technical analysis with high-frequency dat... |

67 | Cointegration, fractional cointegration, and exchange rate dynamics. - Baillie, Bollerslev - 1994 |

53 |
Linear, non-linear, and essential foreign exchange rate prediction with simple technical trading rules.
- Gencay
- 1999
(Show Context)
Citation Context ...and Rogoff (1983, 1988), Baillie and Bollerslev (1989, 1994), Diebold, Gardeazabal and Yilmaz (1994), and Mark (1995). In contrast to the literature on technical analysis with high-frequency data, these researchers employ lower-frequency data (monthly or quarterly) and find that exchange rates are in general unforecastable at the 1 to 12 months horizons. 2 significantly profitable. Kho (1996) also reports profitability of moving averages rules in currency markets and demonstrates that part of excess returns can be accounted for by a timevarying risk premium. Other studies in this area include Gencay (1999), Lee and Mathur (1996), Neely et al. (1997), Taylor (1994), and Sweeney (1988). It is unclear, however, whether the profitability of mechanical trading rules will be significant out of sample. In practice, a researcher can examine many trading rules for a given data set and there is a high probability that one such rule will yield superior performance ex post even if it does not provide any useful economic signal ex ante. In other words, there is a possibility that any superior results obtained may be due to pure luck rather than due to any merit of the trading rules designed. This is the so-... |

51 |
Bid-Ask Spread in the Interbank Foreign Exchange Markets,
- Bessembinder
- 1994
(Show Context)
Citation Context ...ading rule studied: “always long” and “always neutral.” In the “always long” position, the investor buys and holds the foreign currency for the entire 3 We have tried to get an estimate of the daily interest rate differentials based on monthly data of the three-month Euro currency interest rates. We find that the daily mean absolute interest rate differential between the dollar and the other currencies lies between 0.006 percent to 0.013 percent in our sample period. In contrast, the daily mean absolute exchange rate change lies between 0.18 percent to 0.55 percent (see Table I). Furthermore, Bessembinder (1994) documents that the bid-ask spreads for major currencies in the spot markets are in the order of 0.05 percent to 0.08 percent. The above observations suggest that interest rate differentials are much lower than exchange rate changes and typical bid-ask spreads, and should not be a significant factor in influencing daily currency trading decisions. 9 forecasting period. In the “always neutral” position, the investor does not take a position (either long or short) and simply holds the dollar throughout the investment horizon. It can be seen from (2) that when the benchmark trading rule is “alway... |

51 |
Some New Filter Rule Tests: Methods and Results,”
- Sweeney
- 1988
(Show Context)
Citation Context ...abal and Yilmaz (1994), and Mark (1995). In contrast to the literature on technical analysis with high-frequency data, these researchers employ lower-frequency data (monthly or quarterly) and find that exchange rates are in general unforecastable at the 1 to 12 months horizons. 2 significantly profitable. Kho (1996) also reports profitability of moving averages rules in currency markets and demonstrates that part of excess returns can be accounted for by a timevarying risk premium. Other studies in this area include Gencay (1999), Lee and Mathur (1996), Neely et al. (1997), Taylor (1994), and Sweeney (1988). It is unclear, however, whether the profitability of mechanical trading rules will be significant out of sample. In practice, a researcher can examine many trading rules for a given data set and there is a high probability that one such rule will yield superior performance ex post even if it does not provide any useful economic signal ex ante. In other words, there is a possibility that any superior results obtained may be due to pure luck rather than due to any merit of the trading rules designed. This is the so-called data-snooping problem, whose importance has been recognized by researche... |

43 |
Currency Orders and Exchange Rate Dynamics: An Explanation for the Predictive Success of Technical Analysis,
- Osler
- 2003
(Show Context)
Citation Context ... becomes much weaker due to potential structural changes in exchange rate dynamics. We do not find significant empirical evidence suggesting that the FX market is inefficient. 22 Appendix Trading Rules Investigated Selection Rationale In order to obtain meaningful estimate of data-snooping biases, we include a fairly large number of specifications in our universe. The types of rules we consider are the most popularly employed by market participants and are extensively studied by previous researchers. See for example, LeBaron (1999), Levich and Thomas (1993), Neely (1997), Neely et al. (1997), Osler (2003), Rosenberg (1996), Schulmeister (1987), Surajaras and Sweeney (1992), Sweeney (1986), and the Group of Thirty (1985). Some of the existing studies report a selective number of parameterizations. For example, Sweeney (1986) chooses filter sizes equal to 0.005, 0.01, 0.02, 0.03, 0.04, 0.05 and 0.1. Levich and Thomas (1993) use similar filter rules and moving average rules of 1-5, 5-20 and 1-200 days. LeBaron (1999) considers the 150-day moving average rule. Schulmeister (1987) employs double moving average rules of 3-10, 5-10, and 4-16 days. Most technical analysis studies do not report their c... |

41 | Exchange Rates and Fundamentals: - Mark - 1995 |

40 |
Time-varying risk premia, volatility, and technical trading rule profits: Evidence from foreign currency futures markets,
- Kho
- 1996
(Show Context)
Citation Context ...their results, they report that some rules may be 1 A complementary literature studies the forecasting accuracy of exchange rates using either fundamental analysis or time-series techniques. See, for example, Meese and Rogoff (1983, 1988), Baillie and Bollerslev (1989, 1994), Diebold, Gardeazabal and Yilmaz (1994), and Mark (1995). In contrast to the literature on technical analysis with high-frequency data, these researchers employ lower-frequency data (monthly or quarterly) and find that exchange rates are in general unforecastable at the 1 to 12 months horizons. 2 significantly profitable. Kho (1996) also reports profitability of moving averages rules in currency markets and demonstrates that part of excess returns can be accounted for by a timevarying risk premium. Other studies in this area include Gencay (1999), Lee and Mathur (1996), Neely et al. (1997), Taylor (1994), and Sweeney (1988). It is unclear, however, whether the profitability of mechanical trading rules will be significant out of sample. In practice, a researcher can examine many trading rules for a given data set and there is a high probability that one such rule will yield superior performance ex post even if it does not... |

33 | On cointegration and exchange rate dynamics. - Diebold, Gardeazabal, et al. - 1994 |

32 |
Trading Futures Using a Channel Rule: A Study of the Predictive Power of Technical Analysis with Currency Examples,
- Taylor
- 1994
(Show Context)
Citation Context ...), Diebold, Gardeazabal and Yilmaz (1994), and Mark (1995). In contrast to the literature on technical analysis with high-frequency data, these researchers employ lower-frequency data (monthly or quarterly) and find that exchange rates are in general unforecastable at the 1 to 12 months horizons. 2 significantly profitable. Kho (1996) also reports profitability of moving averages rules in currency markets and demonstrates that part of excess returns can be accounted for by a timevarying risk premium. Other studies in this area include Gencay (1999), Lee and Mathur (1996), Neely et al. (1997), Taylor (1994), and Sweeney (1988). It is unclear, however, whether the profitability of mechanical trading rules will be significant out of sample. In practice, a researcher can examine many trading rules for a given data set and there is a high probability that one such rule will yield superior performance ex post even if it does not provide any useful economic signal ex ante. In other words, there is a possibility that any superior results obtained may be due to pure luck rather than due to any merit of the trading rules designed. This is the so-called data-snooping problem, whose importance has been rec... |

29 |
The efficiency of the market for foreign exchange under floating exchange rates,
- Cornell, Dietrich
- 1978
(Show Context)
Citation Context ...ormation to predict changes in exchange rate in the future and hence to make an abnormal (risk-adjusted) profit.1 In particular, popular technical trading strategies, which use current and past price and volume data and are guided by mechanical algorithms, should not be able to beat the market. This suggests a simple and robust test for the weak form efficient market hypothesis. Hence, a researcher can apply numerous rules to a given data set and a finding of significant profitability of a technical trading rule is often interpreted as evidence of violation of the weak form market efficiency. Cornell and Dietrich (1978) are the first to document large profits of filter rules and moving average rules for the Dutch guilder, the Deutsche mark and the Swiss franc using the post-Bretton Wood data. Sweeney (1986) applies simple filter rules to the dollar-Deutsche mark exchange rate and finds significant profitability of these rules. He also shows that filter rule profits cannot be easily explained by risk. Levich and Thomas (1993) examine the profitability of filter rules and moving average rules using futures prices for five currencies. Using a bootstrap re-sampling method to evaluate the statistical significance... |

27 |
Technical Analysis and Central Bank Intervention.”
- Neely, Weller
- 2001
(Show Context)
Citation Context ...of-sample test indicates that the null hypothesis can be rejected at the five percent level for only two currencies. These results suggest that exchange rate series may have undergone structural changes over time, and the FX market has become increasingly more efficient. Our analyses for cross exchange rates produce similar results and confirm the robustness of our basic findings. Several researchers have attempted to explain why technical rules are profitable in terms of their economic contents. LeBaron (1999) claims that much exchange rate predictability is due to central bank intervention. Neely and Weller (2001) and Neely (2002) show that trading rule returns precede central bank interventions. Intervention does not create market inefficiency from which technical rules profit. But rather, intervention is intended to halt predictable trends from which trading rules have profited. Sapp (2004) finds that both profitability and market uncertainty increase preceding central bank intervention and remain high during intervention. He demonstrates that a time-varying risk premium may play a possible role around interventions. Kho (1996) also shows that time-varying risk premium and conditional volatility expl... |

26 | Have Trading Rule Profits in the Currency Markets Declined over Time?”
- Olson
- 2004
(Show Context)
Citation Context ...n after adjustments for data-snooping biases are made, the best-performing rules generate significant excess returns, Sharpe ratios and Jensen alpha’s for all seven currencies. The excess returns cannot be easily attributed to systematic market risk. However, most predictability of exchanger rates comes from the early part of the sample. Trading-rule profitability becomes much weaker in the second part of the sample, suggesting that exchange rates may have undergone structural changes and the market 16 has become more efficient over time.15 These results are consistent with LeBaron (2002) and Olson (2004), who claim that technical analysis has become less profitable in the recent decade. IV. Further Results on Trading-Rule Profitability The proceeding section demonstrates that when technical trading rules are applied to the FX market, a potential data-snooping problem arises and can lead to incorrect inference. Our results for seven U.S. dollar exchange rates show that after correcting for such biases, there exists substantial evidence that mechanical strategies yield superior performance for the first half of the sample, but the evidence becomes much weaker in the second part of the sample. I... |

23 |
Central bank intervention and trading rule profits in foreign exchange markets,
- Szakmary, Mathur
- 1997
(Show Context)
Citation Context ... a trading signal. Therefore, P is 256, T is 6463, and N is 6208. We investigate 69 filter rules, 858 moving average rules, 560 trading range break rules, and 640 channel breakout rules. Thus the total number of trading rules (L) is 2127. Sweeney (1986) shows that the excess returns from filter rules are primarily dependent on exchange rate variations, and not much on interest-rate differentials. Since it is difficult to obtain high-quality daily interest rate data, following the general practice in the literature (e.g., Sweeney (1986), Surajaras and Sweeney (1992), Lee and Mathur (1996), and Szakmary and Mathur (1997)), we ignore interest-rate differentials in calculating returns.3 Thus, the rate of return (r) of the kth trading rule at time t is computed as TtLkgIIabsIssr tktktktttk ,...,256;,...,1,)()( 2,1,1,1, ==−−−= −−−− (2) where st is the natural logarithm of exchange rate (domestic currency price of one unit foreign currency); Ik, t represents the trading signal generated by the k th trading rule using information available at time t and this dummy variable may take three values: 1 represents a long position, 0 represents a neutral position, and -1 represents a short position; and g is a one-way tra... |

21 | The temporal pattern of trading rule returns and exchange rate intervention: Intervention does not generate technical trading profits.
- Neely
- 2002
(Show Context)
Citation Context ...t the null hypothesis can be rejected at the five percent level for only two currencies. These results suggest that exchange rate series may have undergone structural changes over time, and the FX market has become increasingly more efficient. Our analyses for cross exchange rates produce similar results and confirm the robustness of our basic findings. Several researchers have attempted to explain why technical rules are profitable in terms of their economic contents. LeBaron (1999) claims that much exchange rate predictability is due to central bank intervention. Neely and Weller (2001) and Neely (2002) show that trading rule returns precede central bank interventions. Intervention does not create market inefficiency from which technical rules profit. But rather, intervention is intended to halt predictable trends from which trading rules have profited. Sapp (2004) finds that both profitability and market uncertainty increase preceding central bank intervention and remain high during intervention. He demonstrates that a time-varying risk premium may play a possible role around interventions. Kho (1996) also shows that time-varying risk premium and conditional volatility explain a substantial... |

19 | Dangers of Data Mining: The Case of Calendar Effects in Stock Returns.” - Sullivan, Timmermann, et al. - 2001 |

17 |
Trading Rule Profits in European Currency Spot CrossRates.”
- Lee, Mathur
- 1996
(Show Context)
Citation Context ...3, 1988), Baillie and Bollerslev (1989, 1994), Diebold, Gardeazabal and Yilmaz (1994), and Mark (1995). In contrast to the literature on technical analysis with high-frequency data, these researchers employ lower-frequency data (monthly or quarterly) and find that exchange rates are in general unforecastable at the 1 to 12 months horizons. 2 significantly profitable. Kho (1996) also reports profitability of moving averages rules in currency markets and demonstrates that part of excess returns can be accounted for by a timevarying risk premium. Other studies in this area include Gencay (1999), Lee and Mathur (1996), Neely et al. (1997), Taylor (1994), and Sweeney (1988). It is unclear, however, whether the profitability of mechanical trading rules will be significant out of sample. In practice, a researcher can examine many trading rules for a given data set and there is a high probability that one such rule will yield superior performance ex post even if it does not provide any useful economic signal ex ante. In other words, there is a possibility that any superior results obtained may be due to pure luck rather than due to any merit of the trading rules designed. This is the so-called data-snooping pr... |

17 |
Data-Snooping Biases in
- Lo, MacKinlay
- 1990
(Show Context)
Citation Context ...ed at the 5 percent level for four out of five exchange rates for the first sub-sample, it cannot be rejected at the 5 percent level for any exchange rate for the second sub-sample after correcting for data snooping. Overall, results for the cross exchange rates are qualitatively similar to those for the U.S. dollar rates. Trading rules appear to work for the first sub-sample for most currencies, but become mostly unprofitable for the second sub-sample. These results are consistent with Lee and Mathur (1996) but are in contrast with Neely et al. (1997). B. Out-of-Sample Test As pointed out by Lo and MacKinlay (1990) and others, out-of-sample experiments are a way of purging the effects of data-snooping biases in a given analysis. Our last check for the robustness of the profitability of technical trading rules involves an out-of-sample test. To this end, we consider the seven U.S. dollar exchange rates and separate again the full sample into two sub-samples with roughly equal sizes. We use the first sub-sample (1974-1985) to select the best rule out of our universe of 2,127 rules based on the mean return criterion. The best-performing rule selected in the first sub-sample is then evaluated using the out-... |

15 |
Profit-Making Speculation in Foreign Exchange Markets,
- Surajaras, Sweeney
- 1992
(Show Context)
Citation Context ... study the profitability of numerous technical trading rules in the foreign exchange market and to examine the biases due to data snooping. Our paper is the first study to formally investigate the data-snooping biases of technical rules in the foreign exchange market using White’s (2000) Reality Check methodology. We employ four types of popular trading strategies: filter rules, moving average rules, trading range break rules, and channel breakout rules. These rules have been widely used by foreign exchange market practitioners and have been subject to extensive research (see Rosenberg, 1996; Surajaras and Sweeney, 1992; and the Group of Thirty, 1985). For each type of rules, we consider various parameterizations. Overall, we investigate the universe of 2,127 parameterizations of trading rules. We employ daily dollar exchange rate data for seven currencies for the period between April 2, 1973 and December 31, 1998. Our evaluation is based on two performance measures: average return and Sharpe ratio, where the latter criterion accounts for total (stand-alone) risk. We find that over the 26-year period, certain rules do indeed outperform the market even after adjustments are made for data-snooping biases. In p... |

14 |
Currency Forecasting, A Guide to Fundamental and Technical Models of Exchange Rate Determination,
- Rosenberg
- 1996
(Show Context)
Citation Context ... this paper is to study the profitability of numerous technical trading rules in the foreign exchange market and to examine the biases due to data snooping. Our paper is the first study to formally investigate the data-snooping biases of technical rules in the foreign exchange market using White’s (2000) Reality Check methodology. We employ four types of popular trading strategies: filter rules, moving average rules, trading range break rules, and channel breakout rules. These rules have been widely used by foreign exchange market practitioners and have been subject to extensive research (see Rosenberg, 1996; Surajaras and Sweeney, 1992; and the Group of Thirty, 1985). For each type of rules, we consider various parameterizations. Overall, we investigate the universe of 2,127 parameterizations of trading rules. We employ daily dollar exchange rate data for seven currencies for the period between April 2, 1973 and December 31, 1998. Our evaluation is based on two performance measures: average return and Sharpe ratio, where the latter criterion accounts for total (stand-alone) risk. We find that over the 26-year period, certain rules do indeed outperform the market even after adjustments are made f... |

10 |
Technical Trading Profitability in Foreign Exchange Markets in the 1990's.” mimeo,
- LeBaron
- 2002
(Show Context)
Citation Context ...the full sample even after adjustments for data-snooping biases are made, the best-performing rules generate significant excess returns, Sharpe ratios and Jensen alpha’s for all seven currencies. The excess returns cannot be easily attributed to systematic market risk. However, most predictability of exchanger rates comes from the early part of the sample. Trading-rule profitability becomes much weaker in the second part of the sample, suggesting that exchange rates may have undergone structural changes and the market 16 has become more efficient over time.15 These results are consistent with LeBaron (2002) and Olson (2004), who claim that technical analysis has become less profitable in the recent decade. IV. Further Results on Trading-Rule Profitability The proceeding section demonstrates that when technical trading rules are applied to the FX market, a potential data-snooping problem arises and can lead to incorrect inference. Our results for seven U.S. dollar exchange rates show that after correcting for such biases, there exists substantial evidence that mechanical strategies yield superior performance for the first half of the sample, but the evidence becomes much weaker in the second part... |

7 | Forecast Evaluation with Shared Data Sets.” - Sullivan, Timmermann, et al. - 2003 |

2 |
Beating the Foreign Exchange
- Sweeney
- 1986
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Citation Context ... the FX market is efficient, one should not be able to use publicly available information to predict future changes in exchange rates and hence to make an abnormal (risk-adjusted) profit.1 In particular, popular technical trading strategies, which use current and past price and volume data and are guided by mechanical algorithms, should not be able to beat the market. This suggests a simple and robust test for the weak form efficient market hypothesis. Cornell and Dietrich (1978) are among the first to document profitability of filter and moving average rules using the post-Bretton Wood data. Sweeney (1986) finds that filter rules are profitable for the dollar-deutsche mark exchange rate and the profitability cannot be explained by risk. Using futures prices for five currencies, Levich and Thomas (1993) demonstrate based on bootstrap re-sampling that some filter and moving average rules may be significantly profitable even after adjusting for risk.2 The significant profitability documented in these studies is often interpreted as evidence against market efficiency.3 However, since a researcher can examine many trading rules for a given data set, there is a high probability that one such rule wil... |

1 |
Comparing predictive accurary,
- Diebold, Mariano
- 1995
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Citation Context ..., 1ˆ −tθ is a vector of estimated parameters, and X is a vector of observed dependent and predicting variables that satisfy certain regularity conditions.2 In this study, there is no parameter to be estimated. The performance measures are calculated from returns generated by trading rules ( Lkk ,...,1 , =θ ). Our full sample of daily exchange rates starts on April 2, 1973 and ends on December 31, 1998, with a total of 6463 observations for each currency studied. The first trading signal is generated for the 256th observation for all trading rule specifications because some rules require 2 See Diebold and Mariano (1995) and West (1996) for details on the regularity conditions. 8 255 days of previous data in order to provide a trading signal. Therefore, P is 256, T is 6463, and N is 6208. We investigate 69 filter rules, 858 moving average rules, 560 trading range break rules, and 640 channel breakout rules. Thus the total number of trading rules (L) is 2127. Sweeney (1986) shows that the excess returns from filter rules are primarily dependent on exchange rate variations, and not much on interest-rate differentials. Since it is difficult to obtain high-quality daily interest rate data, following the general p... |

1 | Transactions Costs in the Foreign Exchange Markets under the Fixed and Floating Exchange Rates. - McCormick - 1975 |