Christopher J. Neely

Is Technical Analysis in the Foreign Exchange Market Profitable? A Genetic Programming Approach

Using genetic programming techniques to find technical trading rules, we find strong evidence of economically significant out-of-sample excess returns to those rules for each of six exchange rates over the period 1981–1995. Further, when the dollar/Deutsche mark rules are allowed to determine trades in the other markets, there is significant improvement in performance in all cases, except for the Deutsche mark/yen. Betas calculated for the returns according to various benchmark portfolios provide no evidence that the returns to these rules are compensation for bearing systematic risk. Bootstrapping results on the dollar/Deutsche mark indicate that the trading rules detect patterns in the data that are not captured by standard statistical models.

Forecasting the Equity Risk Premium: The Role of Technical Indicators

Academic research relies extensively on macroeconomic variables to forecast the U.S. equity risk premium, with relatively little attention paid to the technical indicators widely employed by practitioners. Our paper fills this gap by comparing the predictive ability of technical indicators with that of macroeconomic variables. Technical indicators display statistically and economically significant in-sample and out-of-sample predictive power, matching or exceeding that of macroeconomic variables. Furthermore, technical indicators and macroeconomic variables provide complementary information over the business cycle: technical indicators better detect the typical decline in the equity risk premium near business-cycle peaks, whereas macroeconomic variables more readily pick up the typical rise in the equity risk premium near cyclical troughs. Consistent with this behavior, we show that combining information from both technical indicators and macroeconomic variables significantly improves equity risk premium forecasts versus using either type of information alone. Overall, the substantial countercyclical fluctuations in the equity risk premium appear well captured by the combined information in technical indicators and macroeconomic variables. Data, as supplemental material, are available at http://dx.doi.org/10.1287/mnsc.2013.1838 . This paper was accepted by Wei Jiang, finance.

The large scale asset purchases had large international effects

The Federal Reserves large scale asset purchases (LSAP) of agency debt, MBSs and long-term U.S. Treasuries not only reduced long-term U.S. bond yields also significantly reduced long-term foreign bond yields and the spot value of the dollar. These changes were much too large to have been generated by chance and they closely followed LSAP announcement times. These changes in U.S. and foreign bond yields are roughly consistent with a simple portfolio choice model. Likewise, the exchange rate responses to LSAP announcements are roughly consistent with a UIP-PPP based model. The success of the LSAP in reducing long-term interest rates and the value of the dollar shows that central banks are not toothless when short rates hit the zero bound.

An Analysis of Recent Studies of the Effect of Foreign Exchange Intervention

Two recent strands of research have contributed to our understanding of the effects of foreign exchange intervention: 1) the use of high frequency data; 2) the use of event studies to evaluate the effects of intervention. This article surveys recent empirical studies of the effect of foreign exchange intervention and analyzes the implicit assumptions and limitations of such work. After explicitly detailing such drawbacks, the paper suggests ways to better investigate the effects of intervention.

The Adaptive Markets Hypothesis: Evidence from the Foreign Exchange Market

We analyze the intertemporal stability of excess returns to technical trading rules in the foreign exchange market by conducting true, out-of-sample tests on previously studied rules. The excess returns of the 1970s and 1980s were genuine and not just the result of data mining. But these profit opportunities had disappeared by the early 1990s for filter and moving average rules. Returns to less-studied rules also have declined but have probably not completely disappeared. High volatility prevents precise estimation of mean returns. These regularities are consistent with the Adaptive Markets Hypothesis (Lo (2004)), but not with the Efficient Markets Hypothesis.

Technical Analysis and Central Bank Intervention

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.

Unconventional Monetary Policy Had Large International Effects

The Federal Reserve’s unconventional monetary policy announcements in 2008–2009 substantially reduced international long-term bond yields and the spot value of the dollar. These changes closely followed announcements and were very unlikely to have occurred by chance. A simple portfolio choice model can produce quantitatively plausible changes in U.S. and foreign excess bond yields. The jump depreciations of the USD are fairly consistent with estimates of the impacts of previous equivalent monetary policy shocks. The policy announcements do not appear to have reduced yields by reducing expectations of real growth. Unconventional policy can reduce international long-term yields and the value of the dollar even at the zero bound.

Technical Trading Rules in the European Monetary System

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The temporal pattern of trading rule returns and exchange rate intervention: intervention does not generate technical trading profits

Abstract This paper characterizes the temporal pattern of trading rule returns and official intervention for Australian, German, Swiss and U.S. data to investigate whether intervention generates technical trading rule profits. The data reject the hypothesis that intervention generates inefficiencies from which technical rules profit. In particular, high frequency data show that abnormally high trading rule returns precede German, Swiss and U.S. intervention. Australian intervention precedes high trading rule returns, but trading/intervention patterns make it implausible that intervention actually generates those returns. Rather, intervention responds to exchange rate trends from which trading rules have recently profited.

Information Shares in the U.S. Treasury Market

This paper characterizes the tatonnement of high-frequency returns from U.S. Treasury spot and futures markets. In particular, we highlight the previously neglected role of the futures markets in price discovery. The highest futures market shares are in the longest maturities. The estimates of 5-year and 10-year GovPX spot market information shares typically fail to reach 50% from 1999 on. The GovPX information shares for the 2-year contract are higher than those of the 5- and 10-year maturities but also decline after 1998. Standard liquidity measures, including the relative bid-ask spreads, number of trades, and realized volatility are statistically significant and explain up to 21% of daily information shares. The futures market gains information share in about 1/4 of the events where public information is released, but days of macroeconomic announcements rarely explain information shares independently of their effects on liquidity.