Predictability, trading rule profitability and learning in currency markets

Valerio Potì, Richard M. Levich, Pierpaolo Pattitoni and Paolo Cucurachi

International Review of Financial Analysis, 2014, vol. 33, issue C, 117-129

Abstract: This paper studies currency predictability over time. We assess predictability by testing for the presence of exploitable patterns in currency returns. To do so, we first generate consistent and parsimonious reduced-form estimates of currency expected returns and variances and then use these estimates to form dynamic trading strategies that maximize the multi-period Sharpe ratio. Our results show that currency predictability is time-varying and, for a number of currencies, has increased substantially in recent times, casting doubt on the widespread view that currency pricing may be on a path of convergence towards efficiency. We find, however, that currency markets learn in an efficient manner and a close relation between our strategies and indices that track popular technical trading rules, namely moving average cross-over rules and the carry trade, suggesting that the technical rules represent heuristics by which professional market participants exploit currency mispricing.

Keywords: Foreign exchange; Predictability; Market efficiency (search for similar items in EconPapers)
JEL-codes: F31 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S105752191400009X
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:33:y:2014:i:c:p:117-129

DOI: 10.1016/j.irfa.2014.01.001

Access Statistics for this article

International Review of Financial Analysis is currently edited by B.M. Lucey

More articles in International Review of Financial Analysis from Elsevier
Bibliographic data for series maintained by Catherine Liu ().