Journal article
Can risk explain the profitability of technical trading in currency markets?
Journal of international money and finance, Vol.110, p.102285
02/2021
DOI: 10.1016/j.jimonfin.2020.102285
Abstract
•Technical trading rules have earned substantial excess returns in FX markets.•Previous risk-adjustment of these technical returns has been cursory.•Carry-trade risk factors do not explain the technical FX profitability.•No model, of many examined, accounts for the technical profitability.•This failure lends support to non-risk explanations, such as adaptive markets.
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.
Details
- Title: Subtitle
- Can risk explain the profitability of technical trading in currency markets?
- Creators
- Yuliya Ivanova - Promontory Financial Group, 801 17th Street, NW Suite 1100, Washington, DC 20006, USAChristopher J. Neely - Federal Reserve Bank of St. LouisPaul Weller - University of IowaMatthew T. Famiglietti - Federal Reserve Bank of St. Louis
- Resource Type
- Journal article
- Publication Details
- Journal of international money and finance, Vol.110, p.102285
- DOI
- 10.1016/j.jimonfin.2020.102285
- ISSN
- 0261-5606
- eISSN
- 1873-0639
- Publisher
- Elsevier Ltd
- Language
- English
- Date published
- 02/2021
- Academic Unit
- Finance
- Record Identifier
- 9984963057602771
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