Random walk currency futures profits revisited

Kuntara Pukthuanthong, Lee R. Thomas Lee R. Thomas and Carlos Bazan

International Journal of Managerial Finance, 2007, vol. 3, issue 3, 263-286

Abstract: Purpose - Recent research indicates that the random walk hypothesis (RWH) approximately describes the behavior of major dollar exchange rates during the post‐1973 float. The present analysis seeks to examine the profitability of currency futures trading rules that assume that spot exchange rates can be adequately modeled as a driftless random walk. Design/methodology/approach - Two random walk currency futures trading rules are simulated over all available data from the period 1984‐2003. In both cases, the investor buys currencies selling at a discount and sells those selling at a premium, as the RWH implies. The two rules differ only in the way they allocate the hypothetical investor's resources among long and short foreign currency positions. Findings - Results show that an investor who used these trading strategies over the past decade would have enjoyed large cumulative gains, although periods of profit were interrupted by periods of substantial loss. Research limitations/implications - The findings encourage the hope that profitable random‐walk‐based strategies for currency futures trading can be devised. The simulation results have important implications for those willing to hedge, borrowers, and speculators. Originality/value - This paper provides evidence that purchasing futures contracts on currencies priced at a discount and selling futures contracts priced at a premium has generally been a profitable trading strategy during the last two decades of floating exchange rates.

Keywords: Random processes; Futures markets; Currency options (search for similar items in EconPapers)
Date: 2007
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eme:ijmfpp:v:3:y:2007:i:3:p:263-286

DOI: 10.1108/17439130710756916

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