Further evidence on technical trade profitability and foreign exchange intervention

Abstract

New evidence is presented on the positive correlation between returns from technical trading rules and periods of central bank intervention. To that end, the profitability of a trading strategy based on nearest-neighbour (nonlinear) predictors is evaluated, which may be viewed as a generalization of graphical methods widely used in financial markets. Daily data on the US dollar/Deutschmark and US dollar/Japanese Yen covering the 1 February 1982–31 December 1996 period are used. The results suggest that the exclusion of days of US intervention implies a substantial reduction in all profitability indicators (net returns, ideal profit measure, Sharpe ratio and directional forecast), being the reduction grater in the US dollar-Deutschmark case than in the US dollar-Japanese yen case.