1551.5150.2510.02256.0610.4311.0700.4900.1233.1791.2530.1540.0590.0390.24853.03056.0611.0280.44463.6361.2192.188*
[
Australia
0.653*0.6952.4312.1810.2680.1130.2140.48359.09154.5450.6360.64856.0610.8070.8140.6110.8642.6421.8770.2310.0840.0051.00059.09162.1211.4481.50466.6671.6112.578**
0.3580.7322.7221.0680.1320.1510.0320.317
0.2610.6732.8730.7390.0910.1800.1330.343
0.0190.0331.8300.0850.0100.0620.2811.663
0.1130.1362.1930.4180.0510.0800.1661.113
France
Germany
Mean Ret (%)Median Ret (%)Std Dev (%)t-statInformation RatioInterest Dierential (%)SkewnessKurtosisProb >0 (%)Prob >MSCI (%)paired t-testWilcoxon testProb >Equal (%)paired t-testWilcoxon testMean Ret (%)Median Ret (%)Std Dev (%)t-statInformation RatioInterest Dierential (%)SkewnessKurtosisProb >0 (%)Prob >MSCI (%)paired t-testWilcoxon testProb >Equal (%)paired t-testWilcoxon test
0.0640.0371.3950.3710.0460.0210.0500.59751.51546.9701.0630.22748.4850.6580.1950.1410.0711.3220.8660.1070.0170.0700.62653.03046.9700.9970.29153.0300.5711.543
0.2690.4181.2971.6860.2080.1510.5120.36565.15248.4850.2900.20853.0300.2480.3160.2650.5071.4971.4400.1770.1550.5110.64262.12150.0000.6060.31057.5760.0251.370
0.2410.2821.3161.4880.1830.0280.1870.28263.63646.9700.3770.25250.0000.0900.1180.313*0.3191.2981.9600.2410.0300.3200.46463.63646.9700.2770.11246.9700.1910.470
0.3810.0703.8490.8030.0990.0590.2410.42450.00050.0000.0860.01051.5150.3230.1570.3240.0603.7080.7100.0870.0530.0040.04750.00043.9390.1151.55548.4850.1100.655
0.5090.8994.5420.9110.1120.5101.0984.01166.66757.5760.2871.25559.0910.4911.2230.5570.9484.5560.9930.1220.5101.1064.00868.18259.0910.2911.56859.0910.4931.242
0.5490.1673.2431.3740.1690.0560.2040.07954.54550.0000.4710.29150.0000.7510.7440.4990.1603.3101.2260.1510.0490.0520.67256.06148.4850.2530.50851.5150.5110.188
0.5820.4992.6621.7770.2190.0880.0300.96360.60650.0000.6610.38054.5451.0110.2520.5580.5212.6261.7260.2120.0920.0511.00962.12148.4850.4710.73154.5450.8060.380
0.3370.6552.0261.3510.1660.0040.0310.924
0.2200.2051.7001.0520.1290.0070.0570.963
0.3830.5782.0201.5400.1900.0500.0830.811
0.2690.4181.6861.2960.1600.0440.1960.876
(continued )
Table 7.7 (continued)Long±Short WithinLong±Short AcrossCurrency benchmarksÐÐÐÐÐÐÐÐÐÐÐÐÐÐÐÐ ÐÐÐÐÐÐÐÐÐÐÐÐÐÐÐÐÐÐÐÐÐÐÐ ÐÐÐÐÐÐÐÐÐ[Momentum] Interest[Momentum] Interest[MA 4 6 MA 4 63-month[rate][MA 4 6 3-month[rate]1 71; 2; 3 7 [MSCI][Equal]Japan
Mean Ret (%)Median Ret (%)Std Dev (%)t-statInformation RatioInterest Dierential (%)SkewnessKurtosisProb >0 (%)Prob >MSCI (%)paired t-testWilcoxon testProb >Equal (%)paired t-testWilcoxon testSwitzerland Mean Ret (%)Median Ret (%)Std Dev (%)t-statInformation RatioInterest Dierential (%)SkewnessKurtosisProb >0 (%)Prob >MSCI (%)paired t-testWilcoxon testProb >Equal (%)paired t-testWilcoxon test
0.2980.2262.8340.8550.1050.0460.1830.58557.57645.4550.3461.05163.6360.6693.153**0.2490.1651.7431.1610.1430.0320.0970.24954.54551.5150.1260.74462.1210.2372.948**
0.2700.9823.5970.6100.0750.3311.1272.68262.12157.5761.6690.412100.00056.547**7.062**0.3180.5381.8421.4010.1720.2310.7140.71860.60651.5150.1610.24660.6061.0831.306
0.3680.3212.4771.2070.1490.0330.6431.41454.54543.9390.4751.52459.0910.8072.035*0.3370.3611.5671.7460.2150.0350.1900.14162.12146.9700.1500.60457.5760.5561.683
0.4690.2563.2161.1850.1460.0550.1690.79253.03050.0000.6490.32954.5450.9510.5010.2980.0613.5400.6830.0840.0530.2080.17250.00046.9700.0140.98751.5150.2520.112
0.7360.8673.3021.8110.2230.3940.4320.43063.63651.5151.2700.39956.0611.5440.4310.5680.9554.5251.0200.1260.5101.0843.92068.18256.0610.4770.91056.0610.6930.591
0.4230.4252.9861.1500.1420.0700.1850.32053.03048.4850.5440.71256.0610.8391.0000.4600.1572.9991.2460.1530.0550.0250.10953.03053.0300.3800.60457.5760.6581.587
0.5180.6062.7431.5350.1890.0570.0510.22962.12151.5150.7330.01059.0911.0381.5810.5140.3982.4691.6910.2080.0980.0961.21462.12142.4240.5712.239*46.9700.8911.536
0.1060.4523.7960.2260.0280.3671.1422.923
0.0620.6793.5780.1410.0170.3311.1412.705
0.2910.2382.3301.0140.1250.1890.1290.972
0.1740.4572.1100.6700.0820.1980.3660.510
UK
USA
Mean Ret (%)Median Ret (%)Std Dev (%)t-statInformation RatioInterest Dierential (%)SkewnessKurtosisProb >0 (%)Prob >MSCI (%)paired t-testWilcoxon testProb >Equal (%)paired t-testWilcoxon testMean Ret (%)Median Ret (%)Std Dev (%)t-statInformation RatioInterest Dierential (%)SkewnessKurtosisProb >0 (%)Prob >MSCI (%)paired t-testWilcoxon testProb >Equal (%)paired t-testWilcoxon test
0.2100.1361.3901.2250.1510.0510.9421.94956.06159.0910.7241.57554.5451.1050.1250.2320.1981.4351.3160.1620.0470.5272.11862.12160.6061.1541.72256.0611.4760.169
0.3910.3421.8381.7280.2130.2220.2830.51659.09153.0300.9530.11259.0911.2291.4020.485**0.5031.3952.8220.3470.1610.2510.08569.69763.6361.5021.95862.1211.8981.306
0.2600.2101.2761.6530.2030.0490.5291.26660.60654.5450.8980.31051.5151.2980.5970.2640.2481.2721.6830.2070.0440.5051.41556.06159.0911.3231.21753.0301.7020.731
0.0160.2783.5990.0360.0040.0410.1070.24048.48554.5450.0761.03254.5450.3520.6420.1240.1293.5840.2810.0350.0200.0940.25751.51553.0300.5460.01054.5450.6860.374
0.6781.1754.8041.1470.1410.4541.2543.39868.18263.6360.9951.92063.6361.1801.5550.5020.9354.5190.9030.1110.5101.2654.37168.18260.6060.8481.09666.6671.0292.629**
0.4570.1233.1171.1910.1470.0480.0640.08453.03056.0611.1050.50157.5761.3700.5210.5040.2433.1711.2920.1590.0540.1150.07356.06154.5451.3800.22760.6061.5701.319
0.5800.8432.7741.6980.2090.0740.0060.75962.12162.1211.4671.80562.1211.7271.5300.6011.0362.7431.7800.2190.0800.0070.98162.12157.5761.6590.39962.1211.9361.389
0.0200.0301.8080.0910.0110.1930.1300.110
0.1570.0421.8380.6940.0850.2050.1220.593
0.1630.2002.2680.5820.0720.1650.5932.119
0.2140.1181.7371.0020.1230.1010.2510.558
This table shows performance measures and statistics for selected foreign exchange trading strategies. The base currency is denoted on the far left. The MSCIand Equal columns are reproduced from Table 7.1. The ®rst t-stat is used to test the signi®cance of the mean return relative to a null hypothesis of zero. The[Interest Dierential] rows give the mean monthly return due to the interest dierential of the non-domestic relative to the domestic currency. The [Prob >] rowsgive the percentage of the total months that the given strategy has exceeded zero, the MSCI benchmark, and the Equal benchmark. The paired t-test is used totest the signi®cance of the excess returns of each of the ranks and the long±short strategies relative to the MSCI benchmark and the Equal benchmark. TheWilcoxon is a nonparametric test of the excess returns. The [Proportion >] rows give the percentage of the 93 MA combinations that exceed zero, the MSCIbenchmark average return, and the Equal benchmark average return. ** and * indicate signi®cance at the 1 and 5 per cent levels.
Table 7.8 Mean returns across countries for selected strategies
Long±ShortWithin
[1980±1984]
[1985±1989]
0.451(8)0.378(7)0.346(8)
0.124(7)0.106(6)0.441(8)
0.152(8)0.130(7)0.199(7)
0.168(8)0.309(8)0.290(8)
MA 4±6[1±7]MA 4±61; 2; 3N7
0.863(8)1.049(8)0.635(8)0.552(8)
0.227(2)0.287(7)0.831(8)0.877(8)
0.739(8)0.327(7)0.398(8)0.346(8)
0.283(8)0.572(8)0.483(8)0.577(8)
L±S WithinL±S AcrossAll
0.3920.7750.611
0.2240.4420.348
0.1600.4530.327
0.2560.4790.383
MomentumInterest rateMA 4±6
Long±ShortAcross
MomentumInterest rate
Average
[1990±1994]
[1995±2000]

AverageOverall


Average1985±2000
0.224
0.148
0.231
0.182
0.319
0.310
0.415
0.265
0.559
0.395
0.587
0.571
0.588
0.600
0.2580.5370.417
0.2130.4580.353
This table shows the mean monthly returns to the foreign exchange strategies averaged across countries. The numbers in parentheses give the count of countries ineach time period that had a positive mean return for a given trading strategy.
The pro®ts to technical analysis in foreign exchange markets 237value to foreign exchange performance. We will examine these possibilitieslater in the chapter.Table 7.8 gives the average monthly return across base currencies for eachclass of trading rules. As detailed earlier, the Long±Short Within strategieshad their greatest performance during the 1980±1984 period. In addition, theLong±Short Across interest rate rule also did extremely well during the1980±1984 period. What is clear from an examination of Table 7.8 is thatthe Long±Short Within strategies have not performed as well during the 1990sas during the 1980s. This is especially true for the Long±Short Within movingaverage rules. While it is certainly possible to identify select speci®cations inselect base currencies ex post to show that moving-average rules still work, weshould view such results with a fair degree of scepticism. At least on amonthly basis, such trading rules do not appear to earn signi®cant returns.On the other hand, we can see that the performance of the Long±ShortAcross moving-average class has been remarkably stable during the previous20 years. In fact, the performance during the 1995±2000 period has been verystrong. In general, with the exception of the momentum rules, the Long±ShortAcross strategies identi®ed in this chapter still appear to work quite well.In Table 7.9 we show the correlations of the individual trading strategiesfor each base currency. From the Table we can see that the Long±ShortAcross interest rate rule has nearly a zero correlation with the Long±ShortAcross moving-average rules. In spite of the much higher standard deviationto the Long±Short Across interest rate rule, it does appear that substantialdiversi®cation bene®ts would accrue to a combination of the two. Moreover,it also appears that for many base currencies the Long±Short Within movingaverage rules may be combined with the Long±Short Across rules to gain evengreater bene®ts. Clearly, one need not choose one trading strategy to theexclusion of the others.As an additional layer of diversi®cation, one may wish to initiate exposuresacross multiple base currencies for selected strategies. Table 7.10 gives thecorrelations across base currencies for individual strategies. While thecorrelations between the same strategies across multiple base currencies aregreater than the correlations between dierent strategies in the same basecurrency, there are also potential diversi®cation bene®ts by initiating multiplepositions across dierent base currencies. In particular, base currencies can beidenti®ed that oer the greatest potential diversi®cation bene®ts (e.g. usingAustralia or Japan with any other base currency).7.5 CONCLUSIONSThe simple strategies we analyse in this chapter may be easily implemented.We ®nd that following the Long±Short Across moving-average rules will
Table 7.9 Correlations across strategiesLong±Short WithinLong±Short AcrossCurrency benchmarksÐÐÐÐÐÐÐÐÐÐÐÐÐÐÐÐ ÐÐÐÐÐÐÐÐÐÐÐÐÐÐÐÐÐÐÐÐÐÐÐ  ÐÐÐÐÐÐÐÐÐInterestInterestMA 4 6MA 4 6[Momentum] [rate][MA 4 6 [Momentum] [rate]1 71; 2; 3 7 [MSCI][Equal]AustraliaLong±Short Within
MomentumInt RateMA 4 6Long±Short AcrossMomentumInt RateMA 4 61 7MA 4 61; 2; 3 7Currency benchmarks MSCIEqualCanadaLong±Short Within
MomentumInt RateMA 4 6Long±Short AcrossMomentumInt RateMA 4 61 7MA 4 61; 2; 3 7Currency benchmarks MSCIEqual
0.122
0.072
0.8480.009
0.8120.236
0.3310.0020.303
0.5810.0850.550
0.1380.3310.1420.008
0.0590.6750.1020.034
0.3340.0620.3460.8490.072
0.5630.1780.6430.8360.117
0.3450.0790.3640.8150.105
0.2090.8130.0740.0850.109
0.1810.8120.0610.0400.095
0.926
0.013
0.019
0.008
0.0380.951
0.5630.1030.6140.7930.055
0.1210.5210.0360.0300.320
0.0410.4960.0800.0520.244
0.906
0.073
0.105
0.047
0.0790.888
FranceLong±Short Within
MomentumInt RateMA 4 6Long±Short AcrossMomentumInt RateMA 4 61 7MA 4 61; 2; 3 7Currency benchmarks MSCIEqualGermanyLong±Short Within
MomentumInt RateMA 4 6Long±Short AcrossMomentumInt RateMA 4 61 7MA 4 61; 2; 3 7Currency benchmarks MSCIEqual
0.072
0.102
0.8750.147
0.8900.132
0.6520.0120.617
0.6420.1150.608
0.0850.5010.1020.020
0.0500.6950.0930.034
0.6360.0650.7070.8500.150
0.6420.1220.7300.8190.103
0.6580.0450.7030.8170.106
0.1640.3110.0880.1470.124
0.1410.2600.0790.1110.187
0.910
0.079
0.068
0.101
0.0740.948
0.6560.1530.7300.7950.083
0.1310.4730.1640.1330.133
0.0960.5210.1550.0670.222
0.910
0.048
0.033
0.070
0.0380.947
(continued )
Table 7.9 (continued)Long±Short WithinLong±Short AcrossCurrency benchmarksÐÐÐÐÐÐÐÐÐÐÐÐÐÐÐÐ ÐÐÐÐÐÐÐÐÐÐÐÐÐÐÐÐÐÐÐÐÐÐÐ  ÐÐÐÐÐÐÐÐÐInterestInterestMA 4 6MA 4 6[Momentum] [rate][MA 4 6] [Momentum] [rate]1 71; 2; 3 7 [MSCI][Equal]JapanLong±Short Within
MomentumInt RateMA 4 6Long±Short AcrossMomentumInt RateMA 4 61 7MA 4 61; 2; 3 7Currency benchmarks MSCIEqualSwitzerlandLong±Short Within
MomentumInt RateMA 4 6Long±Short AcrossMomentumInt RateMA 4 61 7MA 4 61; 2; 3 7Currency benchmarks MSCIEqual
0.010
0.165
0.8240.126
0.8570.231
0.3150.0190.257
0.5930.0530.573
0.0350.3150.0360.019
0.0150.5630.0330.080
0.3430.0310.3660.8550.142