Working Paper

Can risk explain the profitability of technical trading in currency markets?

Abstract: 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, C-CAPM, Carhart?s 4-factor model, an extended C-CAPM with durable consumption, Lustig-Verdelhan (LV) factors, volatility, skewness and liquidity to explain these technical trading returns. No model plausibly accounts for a substantial amount of technical profitability in the foreign exchange market.

Keywords: Federal Reserve Bank of St. Louis; economic research; Exchange rate; Technical analysis; Technical trading; Efficient markets hypothesis; Risk; Stochastic Discount Factor; Adaptive markets hypothesis; Carry trade;

JEL Classification: F31; G11; G12; G14;

https://doi.org/10.20955/wp.2014.033

Status: Published in Journal of International Money and Finance

Bibliographic Information

Provider: Federal Reserve Bank of St. Louis

Part of Series: Working Papers

Publication Date: 2014-10-30

Number: 2014-33

Related Works

• Publisher Article (2020-09-11) : Can risk explain the profitability of technical trading in currency markets?
• Working Paper Revision (2020-06-12) : Can risk explain the profitability of technical trading in currency markets?
• Working Paper Original (2014-10-30) : You are here.