same class. By focusingon classes of trading rules instead of individual trading rules, we arepresenting the results in a conservative manner ± and as free from ex postselection bias as possible. In eect, we are mixing the weak with the strong ineach class and reporting on those results. 2The chapter is organized as follows. Section 7.2 describes the data andmethodology. Section 7.3 details the divisions and classes of foreign exchangetrading rules analysed in the chapter. Section 7.4 outlines the results. Section7.5 concludes with the ®ndings of the chapter.
7.2 DATA AND METHODOLOGYThe dataset consists of three-month government yields and spot exchangerates taken from the Global Financial Database. 3 We obtained end-of-monthdata for Australia, Canada, France, Germany, Japan, Switzerland, theUnited Kingdom, and the United States for a period spanning January1975 to June 2000. In addition, we obtained MSCI capitalization weightsfor the same period from Morgan Stanley. We computed currency returnsusing each country as the domestic currency. That is, we computed allcombinations of currency returns for the eight countries. We will de®nethis return series as base currency returns. The base currency return frommonth t 1 to t is computed as follows:RB;t 
StSt 1
1
7:1
where the base currency return is RB;t , the spot exchange rate at month t is Stand the spot exchange rate at month t 1 is St 1 . All exchange rates areexpressed as the ratio of units of domestic currency per unit of foreigncurrency.In addition, we computed a similar series of currency returns adjusted forinterest rate dierentials. An investor who uses futures to invest in currenciesor borrows in one country to invest in another would actually experiencethese returns. 4 The futures price at month, t 1, is denoted as Ft 1 . Theinterest-adjusted currency return from month t 1 to t is computed as follows:Rl;t 
StFt 1
1
7:2
whereFt 1  St 1 exp r
rf   1=12
The pro®ts to technical analysis in foreign exchange markets 187Rl;t is the interest-adjusted currency return, r is the domestic interest rate andrf is the foreign interest rate. Note that:Rl;t  rf
r  1=12 
StSt 1
1
7:3
Note that we can subdivide the actual returns from investing in currencyinto two components: the return due to interest dierentials between the nondomestic and domestic currency and the return due to pure currencyappreciation. Direct examination of Equation (7.3) reveals the return dueto interest dierentials to be:rf
r  1=12
7:4
and the return due to pure currency appreciation is:StSt 1
1
7:5
We can see from Equations (7.4) and (7.5) that the return to investing in arelatively strong currency may be mitigated by the relative interest ratedierential between the non-domestic and the domestic countries. In section7.4 we will examine the component of trading rule returns due to the interestrate dierential.Table 7.1 lists summary statistics for the monthly base currency returns ofeach country with each base currency in the far-left column and the referencecurrencies in the subsequent columns. For example, using the Australiandollar as the domestic currency the average monthly appreciation ofCanadian dollars is 0.192 per cent. The MSCI column gives the return to abasket of currencies with the individual country allocation determined by itsMSCI weight. The allocations are determined by excluding the MSCI weightof the domestic currency. That is, if we have four currencies, each with anMSCI weight of 25 per cent, we would give each of the other three currenciesa weight of 33 per cent when we determined the MSCI return for each basecurrency. The Equal benchmark equally weights the seven non-domesticcurrencies for computing a return relative to a base currency.We can easily observe from Table 7.1 that the Australian dollar hasexperienced the greatest depreciation during the previous twenty years. TheJapanese yen has had the greatest appreciation. Because of the relatively largestandard deviation in monthly foreign exchange returns, most of the basecurrency mean returns are insigni®cantly dierent from zero. The Ljung±Box±Pierce (LBP) statistics are presented in the next to last row for each basecurrency and test the joint signi®cance of the ®rst ten autocorrelations. The pvalues for the LBP statistics are given in parentheses in the last row for eachbase currency. In nearly all cases, the p-values are insigni®cant with the most
Table 7.1 Descriptive statistics: base currency returns[Australia] CanadaAustralia Mean Ret (%)Median Ret (%)Std Dev (%)t-statSkewnessKurtosis
[France]
Germany
[Japan]
[Swiss]
[UK]
[US]
[MSCI]
[Equal]
n.a.n.a.n.a.n.a.n.a.n.a.
0.1920.0312.7901.0810.8523.197
0.1120.2304.0440.4340.7281.386
0.2680.1074.2290.9930.7811.786
0.675*0.0054.3442.4361.0862.298
0.3360.0074.4281.1920.8852.163
0.1650.0663.8240.6790.5191.399
0.2920.1132.9131.5701.0974.201
0.392*0.0213.0861.9911.3914.599
0.2910.0883.2901.3901.1803.178
Autocorrelations1n.a.2n.a.3n.a.4n.a.5n.a.6n.a.7n.a.8n.a.9n.a.10n.a.LBP (10)n.a.p-valuen.a.
0.0010.0130.0220.133*0.0540.0460.0110.1090.0100.09310.829(0.629)
0.0590.0370.0100.0370.0280.0330.0790.0240.0700.0525.525(0.146)
0.0650.0410.0130.0620.0220.0270.0770.0200.0640.0485.862(0.173)
0.0090.0640.0890.0020.0460.0750.0600.0250.0960.0318.366(0.407)
0.0890.0260.0110.0640.0090.0600.0410.0100.0970.0036.730(0.249)
0.1150.0230.0840.0620.0080.0930.0340.0100.0850.06911.307(0.666)
0.0480.0320.0030.159*0.0720.0540.0100.1220.0820.04014.640(0.854)
0.0310.0360.0730.1190.0460.0030.0530.0300.1170.02210.193(0.576)
0.0670.0190.0520.0970.0140.0240.0540.0370.0890.0027.307(0.304)
Canada
Mean Ret (%)Median Ret (%)Std Dev (%)t-statSkewnessKurtosis
0.1160.0312.7310.6660.5002.401
n.a.n.a.n.a.n.a.n.a.n.a.
0.0670.2203.3090.3190.0620.023
0.0840.1893.4060.3880.0640.039
0.500*0.0913.7962.0640.7691.996
0.1550.1633.6980.6560.2470.120
0.0100.3413.1930.0480.1491.875
0.1050.0591.3251.2390.3561.130
0.2100.0961.8531.7780.0680.562
0.0930.1492.3310.6250.0970.350
Autocorrelations10.00520.02230.01940.139*50.05660.05970.00580.11190.002100.091LBP (10)11.590p-value(0.687)
n.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.
0.0380.1080.0580.0290.0550.0610.0640.0300.0530.0348.034(0.375)
0.0350.0830.0330.0020.0400.0570.0580.0290.0280.0244.751(0.093)
0.0150.0760.0140.0240.0140.0980.0150.0230.0840.0055.975(0.183)
0.0590.0470.0210.0180.0080.0870.0480.0360.0470.0234.966(0.107)
0.0260.0040.0050.0990.0070.1030.0210.0800.0360.12811.225(0.660)
0.0720.0070.0210.0150.0280.0730.0930.0830.1260.08512.460(0.745)
0.0560.0250.0060.0230.0160.0810.0290.0440.0630.0184.446(0.075)
0.0020.0600.0220.0210.0220.0620.0240.0410.0190.0513.410(0.030)(continued)
Table 7.1 (continued)[Australia] CanadaFrance
Mean Ret (%)Median Ret (%)Std Dev (%)t-statSkewnessKurtosis
[France]
Germany
[Japan]
[Swiss]
[UK]
[US]
[MSCI]
[Equal]
0.0470.2303.9520.1880.4110.689
0.1770.2203.3210.8370.1370.068
n.a.n.a.n.a.n.a.n.a.n.a.
0.152**0.0120.8942.6763.44719.742
0.605**0.3213.2882.8850.7901.805
0.222*0.1091.6032.1700.9584.472
0.0950.2062.5950.5760.0541.275
0.2720.1003.2751.3010.2990.513
0.346*0.2562.4112.2500.4070.914
0.2240.0951.8821.8700.4040.562
Autocorrelations10.04820.04130.01740.04050.01960.03470.08080.02390.068100.056LBP (10)5.405p-value(0.137)
0.0350.1060.0590.0280.0520.0670.0630.0310.0490.0337.806(0.352)
n.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.
0.0280.0570.0330.0400.0490.0750.0280.255**0.193*0.04329.465**(0.999)
0.0130.129*0.0000.139*0.0370.0640.0180.0760.0540.03312.557(0.751)
0.1090.0710.0010.1250.0680.0950.0300.1130.0890.02616.651(0.918)
0.0780.0120.0740.0130.0620.135*0.1170.0170.0360.09314.127(0.833)
0.0460.0830.0730.0070.0620.0810.0790.0070.0700.0298.933(0.462)
0.0260.1250.0910.0590.0890.0550.1080.0090.0480.07214.131(0.833)
0.0350.1020.0920.0610.0710.0580.1120.0260.0550.11615.115(0.872)
Germany Mean Ret (%)Median Ret (%)Std Dev (%)t-statSkewnessKurtosis
0.0940.1074.1110.3590.4180.919
0.0320.1903.4090.1460.1470.162
0.145**0.0120.8662.6193.19617.780
n.a.n.a.n.a.n.a.n.a.n.a.
0.457*0.0033.3262.1540.8611.967
0.0690.0331.3280.8180.0900.691
0.0510.0972.6670.3010.1540.889
0.1250.1143.3490.5880.2000.378
0.1960.1432.5001.2310.2150.689
0.0560.0971.9790.4450.1610.183
Autocorrelations10.05320.04830.00940.06550.01560.02670.08080.02390.065100.055LBP (10)5.963p-value(0.182)
0.0300.0790.0330.0010.0360.0600.0550.0270.0210.0234.346(0.070)
0.0280.0580.0310.0410.0510.0770.0280.249**0.185*0.04628.156**(0.998)
n.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.
0.0350.0980.0090.1190.0340.0660.0090.0720.0470.0029.233(0.490)
0.137*0.1070.0250.0360.142*0.0980.0290.0150.0380.06316.531(0.915)
0.0520.0100.0990.0090.0530.0590.1110.0140.0680.09911.253(0.662)
0.0430.0660.0390.0310.0530.0670.0810.0050.0420.0256.051(0.189)
0.0110.0870.0500.0140.0800.0320.1030.0010.0200.0527.685(0.340)
0.0190.0750.0430.0060.0510.0220.0970.0120.0010.0856.787(0.255)(continued)
Table 7.1 (continued)[Australia] CanadaJapan
Mean Ret (%)Median Ret (%)Std Dev (%)t-statSkewnessKurtosis
[France]
Germany
[Japan]
[Swiss]
[UK]
[US]
[MSCI]
[Equal]
0.4920.0054.1361.8670.7071.457
0.3580.0913.6821.5260.4161.214
0.497*0.3203.1852.4480.5090.970
0.3480.0033.2241.6940.5721.096
n.a.n.a.n.a.n.a.n.a.n.a.
0.2880.1113.2271.4010.3010.964
0.4250.0403.4931.9080.8642.445
0.2670.0663.5661.1740.5040.867
0.2860.1013.1551.4220.7471.715
0.382*0.0192.8862.0770.7691.822
Autocorrelations10.00820.07230.08640.00450.05260.07370.07280.03190.100100.029LBP (10)9.191p-value(0.486)
0.0090.0680.0060.0260.0080.0980.0070.0250.0760.0065.301(0.130)
0.0040.132*0.0080.140*0.0410.0620.0200.0830.0460.02912.832(0.767)
0.0270.0960.0040.1200.0350.0660.0100.0780.0410.0059.210(0.488)
n.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.
0.0010.0720.0360.128*0.0020.0900.0200.0480.0220.0018.302(0.401)
0.0590.0450.0310.1070.0440.1020.0380.0670.1210.00512.407(0.741)
0.0460.0380.0180.0180.0430.1240.0170.0890.0600.0168.210(0.392)
0.0350.0540.0020.0590.0350.1110.0270.0980.0740.0109.094(0.477)
0.0120.0920.0300.1100.0250.1010.0100.0830.0860.00711.395(0.672)
Switzerland Mean Ret (%)
0.1470.0074.2790.5390.4871.099
0.0190.1633.6740.0810.0170.139
0.1960.1091.5761.9520.7133.384
0.0520.0331.3260.6110.0180.780
0.3960.1113.2971.8820.5921.508
n.a.n.a.n.a.n.a.n.a.n.a.
0.1060.0952.8510.5840.4811.180
0.0740.1153.5860.3220.0480.187
0.1380.1472.6660.8110.1110.444
0.0070.0772.2750.0500.2280.243
Autocorrelations10.07420.03630.00740.06550.00460.06470.04880.02190.098100.007LBP (10)6.741p-value(0.250)
0.0540.0450.0250.0170.0080.0910.0440.0260.0410.0274.680(0.088)
0.1040.0750.0010.1180.0750.0970.0270.1060.0880.03016.096(0.903)
0.136*0.1070.0290.0340.143*0.0990.0300.0160.0370.05916.549(0.915)
0.0120.0740.0290.132*0.0010.0900.0210.0490.0240.0028.589(0.428)
n.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.
0.0770.0340.0770.0030.0160.0480.0330.0710.0290.0746.865(0.262)
0.0900.0500.0150.0260.0140.1140.0540.0080.0680.0258.017(0.373)
0.0790.0610.0340.0160.0320.0980.0530.0410.0400.0076.813(0.257)
0.0890.0300.0330.0100.0030.0960.0390.0210.0490.0015.706(0.161)
Median Ret (%)Std Dev (%)t-statSkewnessKurtosis
(continued)
Table 7.1 (continued)[Australia] CanadaUK
Mean Ret (%)Median Ret (%)Std Dev (%)t-statSkewnessKurtosis
[France]
Germany
[Japan]
[Swiss]
[UK]
[US]
[MSCI]
[Equal]
0.0220.0663.7670.0900.1771.005
0.1120.3423.2000.5470.2252.140
0.0280.2062.6040.1670.3131.549
0.1230.0972.6910.7170.3871.140
0.555*0.0403.6642.3761.2803.863
0.1890.0952.9091.0200.7441.775
n.a.n.a.n.a.n.a.n.a.n.a.
0.2090.1523.2331.0120.2452.171
0.3040.1802.6431.8050.4323.426
0.1630.1002.3541.0830.6072.789
Autocorrelations10.11020.02330.08340.06150.01060.09970.03880.01090.086100.072LBP (10)11.435p-value(0.675)
0.0310.0040.0030.0920.0080.1080.0210.0790.0370.13411.640(0.69)
0.0810.0130.0720.0120.0620.132*0.1180.0210.0420.08613.922(0.823)
0.0590.0080.1000.0110.0520.0580.1170.0160.0720.09711.804(0.702)
0.0560.0480.0350.0990.0440.1000.0390.0620.1220.00111.872(0.706)
0.0820.0300.0780.0030.0190.