Neely, Christopher J. and Weller, Paul A. (1999) Technical analysis and central bank intervention. Working Paper. Warwick Business School Financial Econometrics Research Centre, University of Warwick.

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Abstract

This paper extends the genetic programming techniques developed in Neely, Weller and Dittmar (1997) to show that technical trading rules can make use of information about U.S. foreign exchange intervention to improve their out-of-sample profitability for two of four exchange rates. Rules tend to take positions contrary to official intervention and are unusually profitable on days prior to intervention, indicating that intervention is intended to check or reverse predictable trends. Intervention seems to be more successful in checking predictable trends in the out-of-sample (1981-1996) period than in the in-sample (1975-1980) period. We conjecture that this instability in the intervention process prevents more consistent improvement in the excess returns to rules. We find that the improvement in performance results solely from more efficient use of the information in the past exchange rate series rather than from information about contemporaneous intervention.

Item Type:	Working or Discussion Paper (Working Paper)
Subjects:	H Social Sciences > HG Finance Q Science > QA Mathematics
Divisions:	Faculty of Social Sciences > Warwick Business School > Financial Econometrics Research Centre Faculty of Social Sciences > Warwick Business School
Library of Congress Subject Headings (LCSH):	Foreign exchange -- United States, Technical analysis (Investment analysis), Federal Reserve banks, Genetic programming (Computer science)
Series Name:	Working Papers Series
Publisher:	Warwick Business School Financial Econometrics Research Centre
Place of Publication:	University of Warwick
Date:	26 March 1999
Volume:	Vol.1999
Number:	No.4
Status:	Not Peer Reviewed
Access rights to Published version:	Open Access
References:	Allen, Franklin and Risto Karjalainen, 1998, "Using Genetic Algorithms to Find Technical Trading Rules," Journal of Financial Economics, 51, 245-71. Bhattacharya, Utpal and Paul A. Weller, 1997, "The Advantage to Hiding One's Hand: Speculation and Central Bank Intervention in the Foreign Exchange Market," Journal of Monetary Economics, 39, 251-77. Dooley, Michael P. and Jeffrey R. Shafer, 1984, “Analysis of short-run exchange rate behavior: March 1973 to November 1981,” in D. Bigman and T. Taya (eds.), Floating Exchange Rates and the State of World Trade Payments, Ballinger: Cambridge, Mass., 43-69. Edison, Hali J., 1993, "The Effectiveness of Central-Bank Intervention: A Survey of the Literature after 1982," Special Papers in International Economics No. 18, Department of Economics, Princeton University. Humpage, Owen, 1998, “U.S. Intervention: Assessing the Probability of Success,” Federal Reserve Bank of Cleveland Working Paper 9608. Kendall, Maurice G. and Alan Stuart, 1958, The Advanced Theory of Statistics, Hafner: New York. LeBaron, Blake, 1998, "Technical Trading Rule Profitability and Foreign Exchange Intervention," forthcoming, Journal of International Economics. Levich R., and L. Thomas, 1993, “The Significance of Technical Trading Rule Profits in The Foreign Exchange Market: A Bootstrap Approach,” Journal of International Money and Finance, 12, 451-74. Neely, Christopher J., 1998, “Technical Analysis and the Profitability of U.S. Foreign Exchange Intervention,” Federal Reserve Bank of St. Louis Review, 80(4), 3-17. Neely, Christopher J. and Paul A. Weller, 1998, “Technical Trading Rules in the European Monetary System,” forthcoming, Journal of International Money and Finance. Neely, Christopher J., Paul A. Weller and Robert Dittmar, 1997, “Is Technical Analysis in the Foreign Exchange Market Profitable? A Genetic Programming Approach,” Journal of Financial and Quantitative Analysis, 32, 405-26. Peiers, Bettina, 1997, “Informed Traders, Intervention and Price Leadership: A Deeper View of the Microstructure of the Foreign Exchange Market,” Journal of Finance, 52, 1589-1614. Sweeney, Richard J., 1986, “Beating the foreign exchange market,” Journal of Finance, 41, 163-82. Szakmary, Andrew C. and Ike Mathur, 1997, “Central Bank Intervention and Trading Rule Profits in Foreign Exchange Markets,” Journal of International Money and Finance, 16, 513-35.
URI:	http://wrap.warwick.ac.uk/id/eprint/1844

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