Previous studies have reported mixed results regarding the success of technical trading rules in currency markets. Abnormal returns were observed in many studies using data up to the mid 1980s, while more recent studies generally report less success for technical trading rules. This paper tests whether moving average trading rule profits have declined over the period from 1971 to 2000. If so, previous profits may represent a temporary inefficiency that has since been eliminated in the currency markets. The hypothesis is tested using 18 exchange rate series over a longer time period than in previous studies. Rules are optimized for successive 5-year in-sample periods from 1971 to 1995 and tested over subsequent 5-year out-of-sample periods. Results show that risk-adjusted trading rule profits have declined over time-from an average of over 3% in the late 1970s and early 1980s to about zero in the 1990s. Thus, market inefficiencies reported in previous studies may have been only temporary inefficiencies.

Have trading rule profits in the currency markets declined over time

The purpose of this report is to review the evidence on the profitability of technical analysis. The empirical literature is categorized into two groups, "early" and "modern" studies, according to the characteristics of testing procedures. Early studies indicated that technical trading strategies were profitable in foreign exchange markets and futures markets, but not in stock markets before the 1980s. Modern studies indicated that technical trading strategies consistently generated economic profits in a variety of speculative markets at least until the early 1990s. Among a total of 92 modern studies, 58 studies found positive results regarding technical trading strategies, while 24 studies obtained negative results. Ten studies indicated mixed results. Despite the positive evidence on the profitability of technical trading strategies, it appears that most empirical studies are subject to various problems in their testing procedures, e.g., data snooping, ex post selection of trading rules or search technologies, and difficulties in estimation of risk and transaction costs. Future research must address these deficiencies in testing in order to provide conclusive evidence on the profitability of technical trading strategies.

https://papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID603481_code17745.pdf?abstractid=603481&rulid=163369&mirid=4

The Profitability of Technical Analysis: A Review

We conduct the first robust study of the oldest known form of technical analysis, candlestick charting. Candlestick technical analysis is a short-term timing technique that generates signals based on the relationship between open, high, low, and close prices. Using an extension of the bootstrap methodology, which allows for the generation of random open, high, low and close prices, we find that candlestick trading strategies do not have value for Dow Jones Industrial Average (DJIA) stocks. This is further evidence that this market is informationally efficient.

/pdf/candlestick-technical-trading-strategies-can-they-create-2whgphf6vm.pdf

Candlestick technical trading strategies: Can they create value for investors?

textThis dissertation consists of five empirical studies on financial markets. Each study can be read independently and covers a specific market, either private equity, corporate bonds or emerging markets. The first study documents that risk factors cannot account for the significant excess returns of selection strategies based on value, momentum or earnings revisions indicators in the emerging equity market. The second study presents empirical evidence that security analysts do not efficiently use publicly available macroeconomic information in their earnings forecasts for emerging markets’ companies. The third study focuses on the emerging currency market and shows that a combination of macroeconomic variables and technical trading rules can be exploited to implement profitable trading strategies. Combining these two types of information improves the risk-adjusted performance. In the study on the corporate bond market we document that common risk factors do a good job in explaining the cross-section of returns on corporate bond portfolios with medium to long maturity, but significantly underestimate the returns on corporate bonds with a short maturity. Comparable evidence of a short-term corporate bond anomaly also shows up in portfolios of corporate bond mutual funds. In the last study we set out a commitment strategy that allows an investor in private equity to maintain a constant portfolio allocation to private equity given the uncertain nature of future cash flows and the limited liquidity.

/pdf/empirical-studies-on-financial-markets-private-equity-4vuruliv3w.pdf

Empirical Studies on Financial Markets: Private Equity, Corporate Bonds and Emerging Markets

Candlestick technical trading strategies : can they create value for investors? : a thesis presented in fulfilment of the requirements for the degree of Doctor of Philosophy in Finance at Massey University, Palmerston North, New Zealand

Chun I. Lee

Papers

On market efficiency of Asian foreign exchange rates: evidence from a joint variance ratio test and technical trading rules