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Fernando Fernández-Rodríguez, Simon Sosvilla-Rivero and Julian Andrada-Felix ()
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Fernando Fernández-Rodríguez: Universidad de Las Palmas de Gran Canaria

No 00-02, Working Papers from Asociación Española de Economía y Finanzas Internacionales

Abstract: In this paper we assess the economic significance of the nonlinear predictability of EMS exchange rates. To that end, and using daily data for nine EMS currencies covering the 1st January 1978- 31st December 1994 period, we consider nearest-neighbour nonlinear predictors, transforming their forecasts into a technical trading rule, whose profitability has been evaluated against the traditional (linear) moving average trading rules, considering both interest rates and transaction costs. Our results suggest that in most of the cases a trading rule based on a nonlinear predictor outperform the moving average, both in terms of returns and in terms of the ideal profit and the Sharpe ratio profitability indicators.

Keywords: Nearest-neighbour prediction methods; Technical trading rules; Exchange rates (search for similar items in EconPapers)
JEL-codes: C53 F31 (search for similar items in EconPapers)
Pages: 21 pages
Date: 2000-09
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Working Paper: Technical Analysis in Foreign Exchange Markets: Linear Versus Nonlinear Trading Rules Downloads
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