Further evidence on technical analysis and profitability of foreign exchange intervention

Simon Sosvilla-Rivero (), Julian Andrada-Felix () and Fernando Fernández-Rodríguez

No 99-01, Working Papers from FEDEA

Abstract: In this paper we present new evidence on the positive correlation Between returns from technical trading rules and periods of central bank intervention. To that end, we evaluate the profitability of a trading strategy based on nearest-neighbour (nonlinear) predictors, which may be viewed as a generalisation of graphical methods widely used in financial markets. We use daily data on the US Dollar/Deutsche mark and US Dollar/Japanese Yen covering the 1 February 1982-31 December 1996 period. Our results suggest that the exclusion of days of US intervention implies a substantial reduction in all profitability indicators (net returns, ideal profit measure, Sharpe ratio and directional forecast), being the reduction grater in the US Dollar-Deustchmark case than in the US Dollar-Japanese yen case.

Keywords: Central bank intervention; Technical trading rules; Exchange rates (search for similar items in EconPapers)
JEL-codes: C53 F31 (search for similar items in EconPapers)
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