The Performance of Trading Rules on Four Asian Currency Exchange Rates

Abstract

This article evaluates the performance of filter rules on four Asian exchange rates against the U.S. dollar. Risk premiums derived from the choice under uncertainty model and the GARCH specification are used to construct the riskadjusted return series. Results show that risk premiums have significant implications for the performance of filter rules. Further, even if investors can tolerate some risk, transaction costs can further eliminate most of the remaining profitable trading opportunities.

Weak-Form Efficiency in Currency Markets

“…Other researchers, including Levich and Thomas (1993), who used a bootstrap technique to test for statistical significance, also reported success with technical trading models. showed that trending existed in the European Monetary System, and Cheung and Wong (1997) reported that Asian currencies also seemed to trend. Okunev and White (2003) examined the performance of momentum trading strategies for eight major currencies and found that such strategies were profitable from the 1970s through the 1990s.…”

Option volume, strike distribution, and foreign exchange rate movements

“…Whether these results provide evidence of potentially profitable trading strategies and market inefficiencies is a very difficult exercise. For example, using a variety of filter rules, Cheung and Wong (1997) demonstrated that incorporating risk premium and transaction costs eliminates most of the abnormal returns. We would expect to find similar results.…”

Stock Price Manipulation: The Role of Intermediaries

“…Academic research on trend-followers is mostly concerned with measuring the profitability of trend-following strategies (see Cheung 1997;Menkhoff and Schlumberger 1995;Levich and Thomas 1993;Sweeny 1986 among others). These studies have found mixed evidence about the profitability of trend-following.…”