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

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

No 2014-033, Working Papers from Federal Reserve Bank of St. Louis

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; Technical trading; Efficient markets hypothesis; Risk; Stochastic Discount Factor; Adaptive markets hypothesis; Carry trade (search for similar items in EconPapers)
JEL-codes: F31 G11 G12 G14 (search for similar items in EconPapers)
Pages: 42 pages
Date: 2014-10-30, Revised 2020-06-12
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Published in Journal of International Money and Finance

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Journal Article: Can risk explain the profitability of technical trading in currency markets? (2021)
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DOI: 10.20955/wp.2014.033

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