PDF《Technical Analysis》

The Obstinate Passion of Foreign Exchange Professionals: Technical Analysis No

769 WARWICK ECONOMIC RESEARCH PAPERS DEPARTMENT OF ECONOMICS The Obstinate Passion of Foreign Exchange Professionals: Technical Analysis Lukas Menkhoff University of Hannover and Mark P.

Taylor University of Warwick and Centre for Economic Policy Research Abstract Technical analysis involves the prediction of future exchange rate (or other asset- price) movements from an inductive analysis of past movements. A reading of the large literature on this topic allows us to establish a set of stylised facts, including the facts that technical analysis is an important and widely used method of analysis in the foreign exchange market and that applying certain technical trading rules over a sustained period may lead to significant positive excess returns. We then analyze four arguments that have been put forward to explain the continuing widespread use of technical analysis and its apparent profitability: that the foreign exchange market may be characterised by not-fully-rational behaviour;

that technical analysis may exploit the influence of central bank interventions;

that technical analysis may be an efficient form of information processing;

and finally that it may provide information on non- fundamental influences on foreign exchange movements. Although all of these positions may be relevant to some degree, neither non-rationality nor official interventions seem to be widespread and persistent enough to explain the obstinate passion of foreign exchange professionals for technical analysis. JEL-Classification: F

31 Keywords: foreign exchange market, technical analysis, market microstructure *The authors are grateful to Carol Osler, Stephan Schulmeister and Yin-Wong Cheung for helpful comments on an earlier version of this paper. Menkhoff gratefully acknowledges financial support from the German Research Foundation (Deutsche Forschungsgemeinschaft DFG). October 17,

2006 Lukas Menkhoff Mark P. Taylor Department of Economics Department of Economics University of Hannover University of Warwick Koenigsworther Platz

1 Coventry CV4 7AL, UK D-30167 Hannover, Germany Mark.Taylor@warwick.ac.uk menkhoff@gif.uni-hannover.de

2 As for the foreign exchange, it is almost as romantic as young love, and quite as resistant to formulae. ― H. L. Mencken

1 Introduction Technical analysis involves the prediction of future exchange rate (or other asset- price) movements from an inductive analysis of past movements, using either qualitative methods (e.g. the recognition of certain patterns in the data for visual inspection of a time-series plot) or quantitative techniques (e.g. based on an analysis of moving averages), or a combination of both. For professional economists, the widespread, continuing use of these techniques in the foreign exchange market (Taylor and Allen, 1992;

Cheung and Chinn, 2001) is somewhat puzzling, since technical analysis eschews scrutiny of economic fundamentals and relies only on information on past exchange rate movements that, according to the weakest notion of market efficiency, should already be embedded in the current exchange rate, making its use either unprofitable or implying that any positive returns that are generated are accompanied by an unacceptable risk exposure.1 On the other hand, despite an apparent emerging consensus that fundamentals such as relative prices or relative monetary velocity are capable of explaining very long-term exchange rate movements (Taylor and Taylor, 2004), there is still no fundamentals-based exchange rate model available that is capable of forecasting exchange rate behaviour over the shorter term (e.g. over a horizon of twelve months or less: Frankel and Rose, 1995;