Time-Varying Risk Premia, Volatility, and Technical Trading Rule Profits: Evidence from Foreign Currency Futures Markets
Posted: 7 Jan 2008
This paper re-examines the efficiency of foreign currency futures markets by evaluating the role of time-varying risk premia and volatility in explaining technical trading rule profits. The results show that large parts of the technical rule profits can be explained by the time-varying risk premia estimated from a general model for the conditional CAPM: The bootstrap distributions for the profits under the null model average one-third to one-half of the actual profits and enclose the actual profits well within the 90% confidence intervals. Time-varying conditional volatility explains an additional 10% of the profits.
Keywords: Technical analysis, Time-varying risk premium, CAPM, GARCH-M model
JEL Classification: F31, G13, G12
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