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The Profitability of Trading in the Foreign Exchange Market: Chartists, Fundamentalists, and Simpletons

Keith Pilbeam

Oxford Economic Papers, 1995, vol. 47, issue 3, 437-52

Abstract: This paper examines the returns and ex post variability of returns associated with the investment strategies of three distinctive groups of hypothetical traders in the foreign exchange market: Chartists, Fundamentalists, and Simpletons. Each group consists of three heterogeneous traders and is distinguished by its use of a different information set for trading purposes. We compare the returns associated with these imperfect traders to those of a perfect trader. The analysis covers four bilateral dollar parities using quarterly data over the period 1974-94. We find that statistically speaking no particular group dominates the others in terms of profitability. With respect to variability, there are some statistically significant differences but no robust conclusions can be drawn. We also find that in terms of yield a random walk investment strategy is beaten for all four parities by a strategy that relies upon recent extrapolation. Copyright 1995 by Royal Economic Society.

Date: 1995
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