Can risk explain the profitability of technical trading in currency markets?

Yuliya Ivanova, Christopher Neely, Paul Weller and Matthew T. Famiglietti

Journal of International Money and Finance, 2021, vol. 110, issue C

Abstract: Academic studies show that technical trading rules would have earned substantial excess returns over long periods in foreign exchange markets. However, the approach to risk adjustment has typically been rather cursory. We examine the ability of a wide range of models: CAPM, quadratic CAPM, downside risk CAPM, Carhart’s 4-factor model, the C-CAPM, an extended C-CAPM with durable consumption, Lustig-Verdelhan (LV) carry-trade factor model, and models including macroeconomic factors, and foreign exchange volatility, skewness and liquidity, to explain these technical trading returns. No model plausibly accounts for much of the technical profitability. This failure implicitly supports non-risk based explanations such as adaptive markets.

Keywords: Exchange rate; Technical analysis; Efficient markets hypothesis; Risk; Stochastic discount factor; Adaptive markets hypothesis (search for similar items in EconPapers)
JEL-codes: F31 G11 G12 G14 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:110:y:2021:i:c:s0261560620302412

DOI: 10.1016/j.jimonfin.2020.102285

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