The Economic Value of Technical Trading Rules: A Non-parametric Utility-based Approach

Hans Dewachter and Marco Lyrio ()

International Economics Working Papers Series from Katholieke Universiteit Leuven, Centrum voor Economische Studiën, International Economics

Abstract: We adapt Brandt's (1999) nonparametric approach to determine the optimal portfolio choice of a risk averse foreign exchange investor who uses moving average trading signals as the information instrument for investment opportunities. Additionally, we assess the economic value of the estimated optimal trading rules based on the investor's preferences. The approach consists of a conditional generalized method of moments (GMM) applied to the conditional Euler optimality conditions. The method presents two main advantages: (i) it avoids ad hoc specifications of statistical models used to explain return predictability; and (ii) it implicitly incorporates all return moments in the investor's expected utility maximization problem. We apply the procedure to different moving average trading rules for the German mark- U.S. dollar exchange rate for the period 1973-2001. We find that technical trading rules are partially recovered and that the estimated optimal trading rules represent a significant economic value for the investor.

Keywords: Technical trading ruls; exchange rates; nonparametric methods (search for similar items in EconPapers)
JEL-codes: F31 G15 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2002-03
New Economics Papers: this item is included in nep-cfn, nep-fin, nep-fmk and nep-ifn
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Journal Article: The economic value of technical trading rules: a nonparametric utility-based approach (2005)
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