Dissertation 1201119

Table of Contents
Table of Contents...................................................................................................................... 1
CHAPTER 1.............................................................................................................................. 3
INTRODUCTION....................................................................................................................... 3
CHAPTER 2.............................................................................................................................. 6
LITERATURE REVIEW............................................................................................................. 6
2.1. The efficient market hypothesis......................................................................................6
2.2. Literature of the wild bootstrapping variance ratio test....................................................7
2.3. Literature of technical trading rules testing.....................................................................9
CHAPTER 3............................................................................................................................ 11
FOREIGN EXCHANGE MARKET, TECHNICAL TRADING RULES AND THE
METHODOLOGIES OF TESTING..........................................................................................11
3.1. Foreign exchange market mechanism and features.....................................................11
3.2. Technical trading rules..................................................................................................12
3.3. Methodologies of testing...............................................................................................15
3.3.1. Variance Ratio test with Bootstrap methodology....................................................15
3.3.2. Technical trading rules testing................................................................................18
CHAPTER 4............................................................................................................................ 23
DATA...................................................................................................................................... 23
CHAPTER 5............................................................................................................................ 25
EMPIRICAL RESULTS........................................................................................................... 25
5.1. Wild bootstrapping Variance ratio test..........................................................................25
5.2. Traditional statistics of trading rules..............................................................................28
CHAPTER 6............................................................................................................................ 40
IMPLICATION AND EXPLANATION.......................................................................................40
CHAPTER 7............................................................................................................................ 44
CONCLUSION........................................................................................................................ 44
ACKNOWLEDGEMENTS.......................................................................................................46
REFERENCES........................................................................................................................ 46
APENDIX 1............................................................................................................................. 50
Dissertation of MSc International

Money and Banking 2011-2012
TESTING EFFICIENCY OF FIVE MAJOR CURRENCY

MARKETS BY A WILD BOOTSTRAPPING VARIANCE
RATIO TEST AND TECHNICAL TRADING RULES
THANH THUY HOANG
Abstract:
This dissertation investigates the efficiency of five major currency markets which are
USD/JPY, USD/CHF, USD/AUD, USD/EUR, and GBP/USD. In this study, the market
efficiency hypothesis is examined by a wild bootstrapping variance ratio test and the
technical trading rules. According to the wild bootstrapping variance ratio test,
USD/AUD and USD/EUR follow the random walk process while the others do not. In
general, the results from testing the moving average rules and trading range
breakout rules support for the variance ratio test results, except for Australian Dollar
case. In more details, there are some evidences of the predictive power of technical
trading rules in the exchange rates which are confirmed that they do not follow
random walk by the variance ratio test.
Keywords: Market efficiency hypothesis, Exchange rates, Variance ratio test,
Bootstrap, Technical trading rules, Dummy variables.
TESTING EFFICIENCY OF FIVE MAJOR CURRENCY MARKETS BY A WILD

BOOTSTRAPPING VARIANCE RATIO TEST AND TECHNICAL TRADING RULES
CHAPTER 1
INTRODUCTION
The foreign exchange (FX) market has a long history of development; especially it
has developed dramatically since the era of high technology revolution. With highspeed Internet connection and supercomputers, a very large proportion of trade now
can be done electronically, automatically and the FX market becomes the most liquid
financial market in the world. Consequently, it attracts an enormous amount of
speculators who want to get a profit from the market. As the number of market
participants in FX market continues to increase, a debate about FX market efficiency
has been raised. Is it possible to enjoy excess returns on FX market just based on
historical trading data and automatic trading rules? Or is the market simply
unpredictable and no speculators can beat the market? There are two principal
schools of thought about this issue. The first school supposes that the FX market
follows the efficient market hypothesis (EMH), so exchange rates follows random
walk and it is impossible to earn abnormal returns on this market. By contrast,
advocates of the second school do not believe in EMH and there are some technical
trading rules can be utilized to make excess profit. In order to test this hypothesis,
random walk test and technical trading rules can be considered as the popular and
favourite proxies. Indeed, these proxies were used to examine EMH by Lee et.al
(2001), Tabakand Lima(2009).
MSc International Money and Banking
3

About the first proxy, if an exchange rate follows a random walk process, that FX
market can be considered as following the weak form of market efficiency and that
exchange rate cannot be predicted. There are many tools to test the random walk
hypothesis, however the variance ratio test is judged as the most powerful one
because of its advantages. This methodology is well known and used widely. For
example, Charles and Darne (2009) tested the random walk behaviour of exchange
rate of Euro against US dollar by a variance ratio test. However, in this dissertation,
the variance ratio test will be improved by combining with the bootstrap methodology
to test the random walk hypothesis.
Another way to test the predictability of the foreign exchange market is examining
the profitability of technical trading rules. According to Brock et.al (1992), technical
analysis has been used from19 th century and become well-known now. Although it
was originally developed in the stock market, technical analysis then has been
employed broadly in other markets such as gold, commodity or foreign exchange. It
is obvious that if trading rules can generate excess returns, it implies that exchange
rates can be forecasted and the market is inefficient. This dissertation explores two
simplest and the most popular technical rules in the foreign exchange market, which
are moving average strategy and trading break range. There were several papers
which investigated aboutthe application of these rules in foreign exchange trading
and whether they make a profit or not. Some of them (Lee et.al (2001), Neely and
Weller (2003)) said that the technical trading rules are useless, however; others
(Neely et.al (1997),LeBaron (1999), Saacke (2002)) pointed out some evidences of
excess returns totechnical trading rules in foreign exchange market.

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It is apparent that variance ratio test, bootstrapping and the profitability of trading are
not new topics to finance literature. The initial contribution of this dissertation is,
however, using these techniques to investigate the profitability of trading rules in the
context of market efficiency hypothesis with updated data of the selected currency
pairs. Firstly, this dissertation applies bootstrap techniques into variance ratio test to
research the randomness of exchange rates. Secondly, my study uses t- test in
order to examine the significance of abnormal returns from trading rules. Moreover,
utilizing update data of five currency pairs (USD/JPY, USD/CHF, USD/AUD,
USD/EUR, GBP/USD) would help to revise the profitability of trading rules in a big
picture of the FX market and compare the application of trading rules in a pool of the
researched currency pairs. Some concepts in this dissertation areinfluenced byBrock
et.al (1992) and Lee et.al (2001) but my studied objects are different. Another
striking contribution of this study is providing some suggestions which based on
practical experiences, for why some currency pairs follow random walk and others
do not.
This study reveals that the results from wild bootstrapping variance ratio test are
generally consistent with the test of trading rules profitability. The variance ratio tests
suggest that USD/CHF, GBP/USD, USD/JPY do not follow the random walk process.
Indeed, there are some evidences of excess returns from trading these exchange
rates by examined trading rules. By contrast, in accordance with the variance ratio
tests, USD/AUD and USD/EUR follow random walk, which means that there is
impossible to earn abnormal returns from these currency pairs. Another remarkable
result is that, according to t- test statistics, there is little evidence of trading rules
profitability with USD/AUD data.
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The structure of this dissertation is organised as follows: Literature of thewild

bootstrapping variance ratio test and technical analysis will be discussed in Chapter
2. Chapter 3 describes the foreign exchange market, technical trading rules and
testing methodology. The data will be explained clearly in the Chapter 4. Chapter 5
assesses the significance of results from the wild bootstrapping variance ratio test
and traditional statistics. Chapter 6expresses the implication and explanation of
results. Finally, the conclusion is drawn in Chapter 7.
CHAPTER 2
LITERATURE REVIEW
2.1. The efficient market hypothesis
The efficient market hypothesis (EMH) states that a market is efficient when all
available information in the market is fully reflected into prices (exchange rates).
According to Fama (1970), there are three forms of market efficiency which are the
strong, the semi-strong and the weak form hypothesis (the return predictability
hypothesis by Fama (1991)). Among these forms, the weak- form EMH which
indicates a random walk is the most commonly examined topic in the empirical
literature.
If an exchange rate follows a random walk process, it means the market is the weak
form of the EMH. In this case, the exchange rate cannot be forecasted, so it is
impossible for speculators to earn abnormal returns. By contrast, if the null
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hypothesis of random walk is rejected, the exchange rate is predictable and excess
returns could be generated using specific investment strategies.
2.2. Literature of the wild bootstrapping variance ratio test
Based on the above concept, there are enormous numbers of papers which
investigated the randomness of exchange rates. Lee et.al (2001) stated that the
variance ratio test is considered to be more powerful than other methods, such as
unit root tests and BoxPierce Q test for serial correlations. In more details, Lee et.al
(2001) argued that the hypothesis of unit root only refers to the zero-mean
stationary process of the error, so an exchange rate which has a unit root can still
be forecasted, ultimately leading to the wrong conclusion of randomness. In fact, the
conventional form of variance ratio test was introduced first by Lo and MacKinlay
(1988). Applying this methodology, Liu and He (1991) found that five examined
currency pairs (CAD, JPY, GBP, FF and DM relatives to USD) reject the random
walk hypothesis at 5% significance level. With the set of Asian data, Ajayi and
Karemera (1996) indicated that the Malaysian ringgit, the Taiwanese dollar and the
Thai baht do not follow the EMH, whereas the rest five pairs (Hong Kong dollar,
Indonesia rupiah, Singaporean dollar, Korean won, Philippine peso) follow the
random walk process. The multiple variance ratio test then was developed by Chow
and Denning (1993). However, These VR tests are asymptotic tests, which can
show small sample deficiencies, stated by Kim (2006, p.1). Therefore, Kim (2006)
suggested the wild bootstrapping methodology to increase small sample properties
of these tests.

7

It is necessary to review the literature of this bootstrap method. Bootstrapping is

considered as a procedure to measure the accuracy of an estimator by Ruiz and
Pascual (2002, p4). The outstanding benefit of bootstrapping is that it does not
require any special assumption of the distribution of researched data. Another
advantage of this methodology is that it is very simple to use independently of the
complexity of statistics interest. Therefore, bootstrap is applied broadly to null
models such as GARCH models, Value at risk (VaR), Variance ratio test, to name
just a few. For example, Brock (1992) applied bootstrap methodology to generate
distribution of statistics under four null models which are a random walk with a drift,
AR(1), GARCH-M, EGARCH in order to test the trading rules profitability in the US
stock market. Bootstrap technique was also utilized by LeBaron (1999) in examining
the profitability of trading rules as central bank intervention.
Combining the bootstrap methodology with the Variance ratio test helps to check the
random walk hypothesis without the necessity of normality and homoscedasticity.
Therefore, there are many empirical studies which used both these methodologies.
Indeed, by applying Lo and MacKinlay (1988) test and resampling technique of
bootstrap, Chang (2004) concluded that the Japanese Yen reject the random walk
hypothesis whilethe Canadian dollar, the French Franc, the German mark and the
British pound are inclusive. In a different way, Lee et.al (2001) used multiple
variance ratio tests of Cecchetti and Lam (1994) with bootstrap technique to test
EMH in nine currency pairs. From their conclusion, only the Korean won does not
reject the null hypothesis while the rest does. Bymixing Lo and MacKlay VR (1988),
Cecchetti and Lam VR (1994) and bootstrapping, Lima and Tabak (2007) found
evidences of the randomness in 10 selected currency pairs.
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It can be said that there are several ways to combine the variance ration test and the
bootstrapping technique. Kim (2006) proposed one of that, which is a wild
bootstrapping variance ratio test. According to Kim (2006, p.39), It is a resampling
method that approximates the sampling distribution of a statistic, and is applicable to
data with unknown forms of conditional and unconditional heteroskedasticity. This
combination of these methodologies becomes famous and is introduced to the
econometrics software as Eviews 7. This dissertation applied this method of Kim
(2006) and found there are evidences of random walk in USD/AUD and USD/EUR
data. The finding about the Australian Dollar is consistent with the recent results from
Lee et.al (2001) and Azad (2009). Accordingly, the randomness of USD/EUR
confirms the conclusion of Chen (2008).
2.3. Literature of technical trading rules testing
As stated above, testing profitability of technical trading rules can be considered as

another way to test the efficient market hypothesis. According to Murphy (1986) and
Pring (1991), technical analysis is based on three following principles. Firstly, prices
and volume in the market incorporate related information, so it is not necessary to
analyse fundamentals. Secondly, there are trends in the price movements. Thirdly,
history tends to repeats itself. Technical analysis method can be categorized into
two main schools: charts and indicators. The effectiveness of using technical
indicators in trading foreign currencies isstill a controversial topic and it is mentioned
in numerousprevious papers. Regarding to stock markets, Brock et.al (1992)
researched the moving average rules and trading range break out rules which are
the simplest and most popular by utilizing the Dow Jones index. In this paper, Brock
et.al (1992) tested in two cases which are trading rules with 1% band and without
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band. The test results reported that there are several evidences of excess returns by
using these rules. However, when Hudson et.al (1996) repeated similar tests with the
UK stock market, the results found that although trading rules can predict the
movement of stock prices, it is impossible to earn abnormal returns in the presence
of costly trading. Hudson et.al (1996) also studied the relationship between technical
trading rules and the weak form of market efficiency.
For foreign exchange market, Lee and Mathur (1996) applied bootstrap
methodologyin and out of sample tests to study the profitability of moving average
trading rules with six European spot cross rates data. They found that the moving
average trading rules only makes positive profits in case of JY/DM and JY/SF,
whereas, in case of other exchange rates, the profitability of these rules is not
significant.From a different perspective,LeBaron (1999) investigated trading rules
profitability in the context of central bank intervention in the United States. In
particular, LeBaron (1999) applied bootstrap methodology into testing whether
moving average rules can produce abnormal returns. The test results indicated that
the simple moving average rules can forecast movements in USD/JPY and USD/DM
pairs noticeably. Nevertheless, LeBraron (1999) findings also concluded that the
forecast ability of the trading rule declines significantly if the Feds intervention period
was excluded.
Among previous studies, there are several papers which combine two above proxies
in order to test the random walk hypothesis. Lee et.al (2001) applied joint variance
ratio test and technical trading rules (moving average and channel) to test whether
nine Asian exchange rates follow the random walk process or not. Eight over nine
currency pairs rejected the null hypothesis at 5% significant level, which implies little
10

evidence of randomness of these exchange rates. The test results concluded that
these rules do not bring significant excess returns.
By replicating the methodologies, the study of Tabak and Lima (2009) employed
Brazilian exchange rate data to test the weak form efficiency. The variance ratio
tests of this work are used in combination with block bootstrap methodology to
prevent size distortions. Their first finding is that there are evidences of random walk
in the short run, but the null hypothesis is rejected in the long run. The second
conclusion is that the trading rules Moving average rules and Trading range
breakout rules- are not significant in generating abnormal returns.
CHAPTER 3
FOREIGN EXCHANGE MARKET, TECHNICAL TRADING RULES
AND THE METHODOLOGIES OF TESTING
3.1. Foreign exchange market mechanism and features
Foreign exchange market is considered as the largest and the most liquid market on
the world with more than $4 trillion average daily trading volume (Bank for
International Settlement, 2010). In this market, goods are not exchanged for money;
goods are indeed currencies - the monetary units. Indeed, the FX market is not a
physical place; it is mainly an electronic linking system among big banks, large

11

financial companies, brokers, dealers and so on. It can be said that this is the most
liquid market in comparison with others markets.
In the scope of this dissertation, there are two main concepts in this market which
should be considered. Firstly, the exchange rate is described as the price of foreign
currency denominated in domestic currency. Exchange rates can be expressed by
quoting the amount of domestic currency againstU.S.Dollar(the most common way)
or vice-versa, for example GBP/USD. Secondly, bid and offer rate are often quoted
by two numbers which are bid (buys mark) and offer (sells mark) for example:
GBP/USD= 1.5675/85. Spread is the difference between two prices and it is often
very small. In order to calculate returns easily, this dissertation will ignore the spread
and use the middle rate instead of bid and offer rate.
Due to the wide availability of leverage using (up to 1:100), foreign exchange market
offers high potential profit, people always try to analysis in order to find any chance
of making money. There are two schools of analysing this market which are
fundamental analysis and technical analysis. The fundamental analysis refers to
economic growth, inflation, interest rate, monetary and fiscal policies, balance of
payment and so on. By contrast, the technical analysis refers to trading volume,
chart, price movement and theories.
3.2. Technical trading rules
Technical analysis originated with the simple form from the late of 1800s with the
work of Charles Dow.According to Edwards et.al (2007)-Bassetti 9 thed, technical
analysis can be considered as the study of the action of the market itself. Indeed, it
12

utilizes the historical data of the exchange rates and summarizes in graphic forms in
order to deduce the movement of exchange rates in the past then forecast the
exchange rates in the future. As the main concept of technical analysis is that the
history repeats itself, technical analysis tend to studies the market background and
habits, consequently it includes a great variety of rules which represent for various
forms and trends of the exchange rate movement.
Two simplest rules can be listed as the moving average- oscillator and the trading
range break-out. The moving average strategy is a simple but popular and useful
tool, and another advantage of the moving averages is that it makes the volatile
series smoother. Along with the development of computers, there are various forms
of the moving averages which can categorized as Simple Moving Averages (SMA),
Weighted or Exponential Moving Averages (EMA), and Linear Moving Averages
(LMA). This study, however, just concentrates the simple-but-useful SMA, in which
buy and sell signals are generated when two moving averages of the exchange rates
cross each other. In more details, buy signals are created since the short- period
moving averages cross the longperiod moving averages from below. By contrast,
sell signals are generated when the short - period moving averages cross the longperiod moving averages from above.The length of the period of moving averages
could be various, however the most popular length are 50 and 200 days. In order to
improve the sensitivity of moving averages, this dissertation will examine additionally
10 and 20 days moving averages. The way of building up these moving averages is
the same with every moving average. For instance, 10 days moving average (MA10) is equal to the sum of the exchange rate of 10 days divided by 10. Repeating the
same procedure will create MA-50, MA-100 and MA-200. The moving average
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strategy can lead to different decisions if band is introduced or not. In other words,
introducing band to moving average rules can bring various signals. Thus, this
dissertation will investigate both the moving average with band and without band
(1% band).
With the simple moving average strategy, this study will analyse thoroughly two
specific types which are the variable length moving average (VMA) and the fix length
moving average. Firstly, the variable length moving averageis the rule in which buy
signals are generated when the short moving average penetrates the long moving
average on the upside; while sell signals are created as the short moving average
falls below the moving average line. Without band or a band of zero, the traders can
either buy or sell. By contrast, with a band, if the short moving average line is inside
the band, no signal is generated and trading signals would only are generated when
the short moving average is out of the band.
Secondly, the fix length moving average indicates that buy (sell) signals will be
generated when the short moving average line goes above (below) the long moving
average, then that position will be hold for x days. In next x days, any signals
generated will be ignored. Return of x days holding will be recorded to examine. This
study will investigate the fix length moving average with ten days returns. It should
be noted that there are several forms of moving average rules and this dissertation
just researches two simple types among them.
The final rule which is tested in this dissertation is the trading range break out
(resistance and support levels). In technical analysis, resistance and support level
are the concepts related to the local maximum and minimum respectively. Because
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traders believe that others will sell when the exchange rate reaches the peak, and
sell when the exchange rate goes to the bottom, it will create the resistance (support)
levels where the exchange rate will fall (increase) again. However, in case the
exchange rate does not fall, continues to increase and break the resistance level, it
is the buy signal. By contrast, if the exchange rate fall below the support level, sell
signal is generated. With trading range break rule, this study will also introduce band
to investigate the effect of band on the trading rules.Trading range strategy
researches50, 150 and 200 daysmaximum (minimum).
3.3. Methodologies of testing
3.3.1. Variance Ratio test with Bootstrap methodology
For testing random walk hypothesis, this study utilized the variance ratio (VR) test
which was developed Lo and MacKinlay (1988) and then became popular tool in
random walk testing. This test helps to examine the predictability of exchange rates
by comparing variances of differences of the data gauged over various intervals. The
main concept of this test is that the variance of the random walk increments must be
linear function of the time intervals. In more details, if the exchange rate follows a
random walk, the variance of the
- period difference equals q times the variance of
the first difference one. Let denote VR (q) is the variance ration at lag q. This
variance ratio is calculated by following function.
VR(q)=

15

Where
is an unbiased estimator of the variance of the
exchange rate and
difference of the
is unbiased estimator of the variance of the 1 st difference of
that exchange rate. As main concept of VR stated above, if an exchange rate follow
a random walk, its VR value should be equal to 1 for any q. In the context of testing
EMH for evaluating the probability of trading rules, this dissertation investigates 5
test periods which are 10, 20, 50, 150 and 200 days. If the variance ratio is less than
one, it suggests negative serial correlations and vice versa.
For testing the hypothesis of random walk, there are two versions of VR can be
applied which are standard normal test- statistics under homoscedasticity and
variance ratio test under hetroscedasticity Lo and MacKinlay (1988). Nevertheless,
due to the advantages of bootstrap method, this study will utilize this technique to
provide the p- value of VR test.
In particular, this dissertation uses a wild bootstrapping method of Kim (2006) to

increase thesmall sample properties of VR tests. Wild bootstrapping uses the below
functions of Wright (2000), Lo and MacKinlay (1988) and Chow and Denning (1993)
to compute the individual and joint variance ratio test statistics.
Where

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Where
There are three main steps of the wild bootstrapping tests. The wild bootstrap
version of MV(X,ki) can be cited as a good example of this process. The first step is
forming a bootstrap sample (Xt*) of T observations. The second step is measuring
the variance ratio test statistics from the bootstrap sample which is originated in the
1st step. Then the 1st step and 2nd step are repeated n times to create a bootstrap
distribution of the test statistics
. The bootstrap p- values are
measured from the fraction of bootstrap sample greater than the sample value of
MV(X,
). The detail process is presented clearly by Kim (2006).
In order to use the wild bootstrapping variance ratio test, this dissertation uses the
Eviews 7 software. Numbers of replications in wild bootstrapping technique are
1000.

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3.3.2. Technical trading rules testing
Traditional statistics will be used to examine the profitability of the above trading
rules. General concept of this method is using t- testin order to test the significance
of the excess returns from trading rules. This concept is borrowed from Brock (1992).
In more details, this study calculates the return of exchange rate without any signal
and the return of trading in accordance with the trading rules, and then makes the
comparison. The procedure to test is explained clearly as follows.
Firstly, with the moving average strategy, this dissertation computes the moving
average line as below function.
Where
MA(n) is the moving average in n days
St is the exchange rate in date t
It should be noted that the data which is used to test is not exchange rate, is return
of trading rules. Therefore, it is necessary to indicate buy (sell) signals then calculate
return with respect to those signals. In order to indicate buy (sell) signals with
variable moving average (VMA), this study utilized dummy variables- D with values
as following:
Case: Band of zero

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Dt= +1 if St >MA(n) or MA(n1) > MA(n2)

-1 if St<MA(n) or MA(n1) < MA(n2)
Dt-1 if St= MA(n) or MA(n1)=MA(n2)
Case: Band of 1%
Dt= +1 if St >1.01 x MA(n) or MA(n1) > 1.01x MA(n2)

-1 if St< 0.99 x MA(n) or MA(n1) <0.99 x MA(n2)
0 if 0.99 x MA (n) <=St<= 1.01 x MA(n)
or 0.99 x MA (n2) <=MA (n1) <= 1.01 x MA(n2)
Where
Dt is dummy variable of VMA at date t
MA(n1)
is the short moving average in n 1 days and MA(n2) is the long moving
average in n2 days with n1<n2.
According to the simple moving average rule indicated above, dummy variable (D)
equals to +1 is buy signal, D t equals to -1 is sell signal and 0 is no signal. Returns
from the trading in accordance with above signal are gauged as below
Rt=Dt x (ln (St+1)-ln (St) 1/260 (it it*))
Where
Rt: Return of date t
Dt: Dummy variable of VMA at date t
St+1: Exchange rate at date t
St: Exchange rate at date t
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it: annual interest rate of domestic currency at date t

it*: annual interest rate of foreign currency at date t
In this study, it is assumed that there are 260 trading days per year (5 days per
weeks and 52 weeks per year), so it would be more precise if calculate interest rate
of holding currency per day is equal to annual interest rate divided by 260 (not 365).
This function was used to test technical analysis on USD/DEM pair by Saacke
(2002).
The way of defining dummy variable with the fix length moving average (FMA) is little
bit different because this rule indicates that after the buy (sell) signal is generated,
other signals within 10 days are ignored. Dummy variable and 10days returns of
FMA are explained as below:
Dt= Dt if average of Dt within 10 days is equal to 0

0 if average of Dt within 10 days is not equal to 0
R_10t= Dt x (ln (St+10)-ln (St) 10/260 (it it*))
Where:
Dt is the dummy variable of FMA at date t
Dt is the dummy variable of VMA at date t
St+10 is the exchange rate at date t+10
St is the exchange rate at date t
it: annual interest rate of domestic currency at date t
it*: annual interest rate of foreign currency at date t
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Secondly, with trading range break out (TRB), buy (sell) signals and returns are
defined as follow:
Dt= +1 if St > Max ( St, St+1, , St+1)

-1 if St< Min (St, St+1, , St+1)
0 if Min (St, St+1, , St+1) < St< Max (St, St+1, , St+1)
Rt= Dt x (ln (St+1)-ln (St) 1/260 (it it*))
Let denote Dt is the dummy variable of TRB at date t.
Thirdly, t- statistics for buy (sell) signal are gauged as the function which Brock et.al
(1992) used
t- value Buy (Sell) =
Where
,
is respectively the mean return and the number of buy or sell signals
is respectively the unconditional mean return and the number of observations.
is the estimated variance for entire sample.

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t- value Buy- Sell=
Where
are the mean return of buy signals and sell signals.
are the number of buy signals and sell signals.
The t- value of Buy (Sell) is utilized to test whether or not the mean return from Buy
(sell) signals is higher than the mean return of unconditional trading (daily return of
exchange rate). In other words, t- test will examine whether buy (sell) signals create
excess returns. Accordingly, t- value of Buy- Sell is applied to test whether or not
mean return of buy signals is equal to mean return of sell signals. T- test helps to
define the significance of the excess return from the trading rules.
Given the
confidence intervals, the number of sample and the t-value, this dissertation will
compare t-value with the critical value in a standard table of significance to conclude
whether the t-value is significant or not. If it is significant, it means that the mean
return from trading rules is different from the unconditional mean return. The same
definition of t-test is applied for the case of Buy- Sell.

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CHAPTER 4
DATA
In order to test the profitability of trading rules in the foreign exchange market, this
dissertation examines the Euro (EUR), the Japanese Yen (JYP), The British Pound
(GBP), the Swiss Franc (CHF) and the Australian Dollar (AUD). These currency
pairs can be considered as the main pairs which enjoy the largest volume of trading
in the foreign exchange market. Analysing five currency pairs provides the whole
truer picture of trading rule application on making a profit on the FX market. The
exchange rates of above currencies with the Dollar are the middle exchange rate at
5pm London time. Interest rates of the currencies are the daily offer rate of the
annual interest rates in the interbank at 5pm London time. All data are obtained from
the Datastream resource and the detail code and link of data will be indicated clearly
in the reference.
The data of the Euro is examined from the first trading day of the Euro at 04/01/1999
to 29/06/2012, or approximately 3519 daily observations. However, the data of the
rest currencies are collected from 01/05/1990 to 29/06/2012, which means that there
are 5754 daily observations with each currency data. The purpose of choosing the
same period for 4 currency pairs (USD/AUD, USD/CHF, GBP/USD, USD/JPY) is for
making comparison and having a big picture of trading rules effects on various
exchange rates. Nevertheless, the Euro has just been generated from 1999, so the
examined period of this currency is different.

23

It also should be noted that the exchange rate and the interest rate are just the raw
data. In order to test the profitability of the trading rules, it is necessary to convert the
data to return data which would be the input data for testing. An unconditional daily
return Rt and an unconditional 10 days holding return R_10 t is measured respectively
as following
Rt= ln (St+1)-ln (St) 1/260 (it it*)
R_10t = ln (St+1)-ln (St) 10/260 (it it*)
Table I
Summary statistics for daily and 10- day return
Mean
Standard Error
Standard Deviation
Sample Variance
Kurtosis
Skewness
Minimum
Maximum
Count
Confidence Level(95.0%)
R_CHF
-0.000129
0.000094
0.007143
0.000051
5.918834
0.130819
-0.054193
0.084764
5783
0.000184
R_JPY
-0.000225
0.000090
0.006878
0.000047
4.995331
-0.559872
-0.066328
0.033856
5783
0.000177
R_AUD
0.000029
0.000101
0.007706
0.000059
13.095772
0.713520
-0.065381
0.086377
5783
0.000199
R_GBP
-0.000070
0.000079
0.005977
0.000036
3.993830
-0.120053
-0.039921
0.044185
5783
0.000154
R_EUR
0.000013
0.000112
0.006659
0.000044
1.180004
0.017649
-0.029145
0.036774
3518
0.00022
R_CHF10
-0.001244
0.000297
0.022541
0.000508
1.228618
-0.044038
-0.130065
0.118118
5774
0.000582
R_JPY10 R_AUD10
-0.002233 0.000338
0.000278 0.000302
0.021098 0.022955
0.000445 0.000527
3.389330 7.719509
-0.668176 1.050059
-0.161041 -0.124394
0.089966 0.237274
5774
5774
0.000544 0.000592
R_GBP10
-0.000729
0.000257
0.019536
0.000382
5.124643
-1.057783
-0.161516
0.074939
5774
0.000504
R_EUR10
0.000144
0.000352
0.020879
0.000436
1.171909
0.064111
-0.091526
0.125795
3509
0.000691
Table I presents the statistics of unconditional daily return and unconditional 10days return of five exchange rates. From the results on Table I, it is obvious that all
of the return data have evidence of skewness. In addition, the daily and 10 days
24

return of all currency pairs have highly leptokurtic distribution which causes thick tails
on both sides. These results proved that daily and 10 day return data do not follow
the normal distribution1 rule. Among data, the daily return of AUD has the highest
leptokurtic distribution. Making comparison between these currency pairs could find
that the unconditional one-day mean return of EUR is the highest (0.000029) among
the one of the 5 pairs while JPYs counterpart is the lowest (-0.000225).
Analysing standard deviation, it can be seen that the standard deviation of AUD is
the highest. According to the definition of standard deviation, the high standard
deviation illustrates the points of data are distributed far away from the mean and
vice versa. Therefore, it can be said that the values of AUD are the most scattered
whereas the values of GBP are the least of all data.
CHAPTER 5
EMPIRICAL RESULTS
5.1. Wild bootstrapping Variance ratio test
The null hypothesis of the variance ratio test which is used in this study is exchange
rate is random walk. Table II describes the variance ratio test results with two sets of
test results which are joint test results for all periods and individual tests for different
1
Normal distribution is one of the assumptions of t- test. However, an enormous number of empirical
studies such as Srivastava (1958) demonstrated that with the increase in the sample size, the effect
of non- normality on the power of the t- test diminishes. Therefore, with large samples (more than
3500 samples of USD/EUR and more than 5700 samples of other currency pairs), t- test can arguably
be considered as an effective comparative test without normality assumption. Brock (1992) also did
not check the normality of data when he utilized t- test to examine the profitability of trading rules.

25

lags. P- value (Probability) is shown in Table II is the probability that the variance
ratio is less (greater) than the sample variance ratio if the sample one is less
(greater) than the median of the bootstrap distribution in 1000 replications. Analysing
p- value of joint tests illustrates that the null hypothesis can be rejected at 1% level
with CHF, GBP and JPY data. It implies that these exchange rates do not follow the
random walk. In the contrary, there are evidences of the random walk in USD/AUD
and USD/EUR data. In more details, the joint tests of these data cannot reject the
null hypothesis. The Wald test results are also consistent with these results.
The results from individual tests absolutely support for the joint test. All individual
tests of CHF, GBP and JPY with 10, 20, 50, 150, 200 periods reject the null
hypothesis of a random walk while the rest does not. Indeed, the probability with q
equals to 200 of AUD and EUR are significantly high (92.5% and 96.5%
respectively). By contrast, almost probability with examined periods of CHF, GBP
and JPY is equal to zero. Moreover, taking the variance ratio value of individual tests
into account, it points out that these values of both AUD and EUR data are close to
1, especially EUR data. For instance, variance ratio values of EUR for q equals 10,
20, 50, 150, 200 are 0.99, 1.04, 1.04, 1.05, 0.99 respectively. As stated in the
methodology part, these figures support for the random walk hypothesis.
Table II
Variance ratio test
Panel A
Panel B

26

Panel C
Panel D
Panel E
27

5.2. Traditional statistics of trading rules
The first test of this part is examining the profitability of the various- length moving
average (VMA) rules. The standard test results for five currency pairs with VMA are
presented in table II. The first noticeable point is that USD/AUD and USD/EUR are
two currency pairs which have positive average returns from both buy and sell
signals column 4th and 5th. It implies that the Variable- length moving average rules
bring excess returns with these pairs without respect to buy or sell signals. By
contrast, the rest pairs (USD/CHF, USD/JPY, GBP/USD) have negative average
returns from buy signals and positive returns from sell signals. Returns from buying
these currencies in accordance with variable-length moving rules are also consistent
with the unconditional one-day mean returns of these pairs. Moreover, the average
returns from buy-sell are all negative except for EUR data. The second noteworthy
point to note is that more than 50% sell signals of GBP and JPY in all tests brought
positive returns while these features of AUD, CHF, EUR sometimes are lower than
50%. According to these results, it can be concluded that in the long term- the whole
28

investigated period, selling GBP or JPY in accordance with these rules certainly
made a profit whereas the others do not. The third striking point is that the return of
trading JPY is always the most significant. In more details, the buy return of JPY is
the lowest in comparison with the others while the sell return of this currency is the
highest one.
The second and third column on the table II show the number of buy and sell signals,
which are generated by the variable- length moving average rules. It is obvious that
almost VMA rules create more sell signals than buy signals for AUD, CHF, JPY
(except for (1,10,0) rule with JPY data), whereas these rules produce less sell
signals than buy one for USD/EUR and GBP/USD. It implies that AUD, CHF and
JPY seem to be on a downward trend while EUR and GBP tend to be on an upward
trend.
About t- test for buy signals, all tests with 5 currency pairs do not reject the null
hypothesis that the returns are equal to the unconditional one-day returns at the 5%
significance level using the two tails tests. For the sells, the results of AUD, EUR are
still negative while the results of GBP and CHF are little positive with some trading
rules and these features of JPY are much stronger. T- value of selling GBP in
accordance with only (1,10,0.01) and (1,20,0.01) rules are higher than 1.972 (the
percentage point of the t distribution at 5%). The t-test of equality of CHF sells
returns and unconditional one day returns are stronger than GBP with 4/14 tests
rejects the null hypothesis at 5% level. Selling JPY is the most significant because
11 over 14 t-value are much higher than 2.

29

The 11th and 12th column illustrate returns from buy signals minus returns from sell
signals and their t-test results. It is easy to see that the buy- sell returns of all
currencies except for EUR are both negative. The t-test of equality of buys returns
and sells returns are not significant with EUR, AUD, CHF data, are partially
significant with GBP and strongly significant with JPY data. There are only three over
fourteen tests indicate that the difference between buys and sells returns is equal to
zero cannot be rejected at 5% significance level.
Introducing a band of 1% has variousimpacts on the returns of trading rules. In more

details, for CHF, the band introduction increases the average returns with both buy
and sell signals. By contrast, with the rest data, applying a band of 1% brings
ambiguous results. For instance, AUD average returns from buy signals with 1%
band
is
lower
than
the
one
without
band
(0.000051
compared
to
0.000025)whereas the similar figure of sell signals after introducing 1% band is

higher than the band of zero feature (-0.000011 in comparison with 0.495626).
Taking standard deviation into consideration shows that all standard deviation of
AUD, GBP, JPY returns from rules with 1% band are higher than the feature with a
band of zero. This result denotes that the values of return with theband will are much
more discrete than the one without a band. However, the addition of 1% band into
(1,20) and (1,200) rule with EUR data and (1,20) rule with CHF data decrease the
standard deviation of returns from buy signals. The trading rules using 10 days MA
and 20 days MA of EUR (Panel C) can be cited as good examples for the influence
of the band introduction. While the buying and selling return of these rules without a
band are 0.000126 and 0.00096 respectively, the feature with 1% band are 0.000379
and 0.000110. For the standard deviation, this feature of buy signals is 0.006509
30

with a band of 1% and 0.007236 with a band of zero. The feature of sell signals is
0.006796 and 0.008132 respectively.
Table III
Standard test results for the Variable- length Moving Average rule
Panel A
AUD
(1,10,0)
(1,20,0)
(1,50,0)
(1,200,0)
(1,10,0.01)
(1,20,0.01)
(1,50,0.01)
(1,200,0.01)
(10,20,0)
(20,50,0)
(50,200,0)
(10,20,0.01)
(20,50,0.01)
(50,200,0.01)
Average
N(BUY) N(SELL)
2694
2674
2649
2600
944
1415
1752
2151
2719
2657
2599
616
1324
2252
3089
3109
3134
3183
1044
1630
2180
2753
3064
3126
3184
690
1641
2684
BUY
SELL
BUY>0
SELL>0
0.000107
0.000060
0.000036
0.000056
-0.000283
-0.000086
0.000091
-0.000013
-0.000020
0.000066
0.000049
0.000072
-0.000067
0.000010
0.000006
0.000039
-0.000002
-0.000023
-0.000007
0.000060
-0.000070
-0.000014
0.000062
-0.000072
0.000002
-0.000013
0.000002
0.000082
0.000055
0.000007
0.499629
0.496260
0.500189
0.509231
0.470339
0.480565
0.500000
0.507671
0.493196
0.508468
0.511351
0.498377
0.500000
0.512433
0.495306
0.492441
0.495852
0.500471
0.487548
0.492025
0.501835
0.507810
0.489556
0.502879
0.505025
0.511594
0.517977
0.507824
Std.dev
BUY
0.008761
0.008668
0.008809
0.008880
0.010955
0.009922
0.009624
0.009412
0.008199
0.008620
0.008778
0.021396
0.010419
0.009049
Std.dev
SELL
0.006648
0.006768
0.006631
0.006575
0.007621
0.007226
0.006919
0.006680
0.007238
0.006831
0.006704
0.008416
0.007444
0.006876
t-value
(BUY)
0.431638
0.174155
0.040294
0.147593
-1.152779
-0.502766
0.295802
-0.215073
-0.272780
0.205337
0.111272
0.131248
-0.408222
-0.102152
t-value
(SELL)
0.055085
-0.182158
-0.304532
-0.212473
0.118970
-0.458488
-0.224834
0.182273
-0.589964
-0.156118
-0.245107
-0.088853
0.243660
0.144507
Std.dev
SELL
0.007358
0.007268
0.007452
0.007419
0.007908
0.007446
0.007687
0.007533
0.007266
0.007297
0.007296
0.008016
0.007805
0.007501
t-value
(BUY)
-0.210747
0.107332
0.703383
0.164326
1.462430
0.863891
0.506876
0.373337
0.291093
0.806640
0.053264
0.563721
0.079198
0.231117
t-value
(SELL)
1.397602
1.700938
2.278372
1.786728
1.278583
1.811156
2.127482
1.748202
1.885080
2.374678
1.701884
1.898161
1.323945
1.091076
BUY-SELL
0.000068
0.000063
0.000059
0.000063
-0.000343
-0.000016
0.000106
-0.000074
0.000053
0.000064
0.000062
0.000070
-0.000148
-0.000046
-0.000001
t-value
(BUY_SELL)
0.335373
0.308014
0.291754
0.309228
-0.990069
-0.056528
0.427523
-0.335411
0.259602
0.313725
0.304012
0.164912
-0.521154
-0.206896
Panel B
CHF
(1,10,0)
(1,20,0)
(1,50,0)
(1,200,0)
(1,10,0.01)
(1,20,0.01)
(1,50,0.01)
(1,200,0.01)
(10,20,0)
(20,50,0)
(50,200,0)
(10,20,0.01)
(20,50,0.01)
(50,200,0.01)
Average
N(BUY) N(SELL)
2824
2862
2784
2574
1047
1585
1999
2182
2803
2773
2496
697
1557
2021
2959
2921
2999
3209
1108
1697
2255
2932
2980
3010
3287
825
1823
2760
BUY
SELL
BUY>0
SELL>0
-0.000164
-0.000112
-0.000013
-0.000102
0.000222
0.000046
-0.000035
-0.000062
-0.000081
0.000004
-0.000120
0.000032
-0.000113
-0.000087
-0.000042
0.000096
0.000146
0.000237
0.000152
0.000170
0.000228
0.000248
0.000154
0.000174
0.000252
0.000136
0.000375
0.000125
0.000051
0.000182
0.491501
0.492662
0.499641
0.506993
0.501433
0.509148
0.504252
0.510999
0.504460
0.507032
0.508413
0.493544
0.502890
0.511133
0.499493
0.500514
0.506836
0.512309
0.500000
0.510902
0.512639
0.496589
0.511409
0.513621
0.512930
0.520000
0.511245
0.508333
Std.dev
BUY
0.006909
0.007012
0.006791
0.006782
0.007110
0.006822
0.006822
0.006865
0.007008
0.006969
0.006935
0.008002
0.007321
0.007086
Panel C

31
BUY-SELL
-0.000260
-0.000258
-0.000250
-0.000253
0.000051
-0.000182
-0.000283
-0.000216
-0.000256
-0.000248
-0.000256
-0.000343
-0.000238
-0.000138
-0.000224
t-value
(BUY_SELL)
-1.384703
-1.374746
-1.331550
-1.339256
0.166763
-0.730269
-1.291277
-1.070075
-1.360914
-1.319802
-1.352193
-0.933761
-0.964995
-0.658208

EUR
(1,10,0)
(1,20,0)
(1,50,0)
(1,200,0)
(1,10,0.01)
(1,20,0.01)
(1,50,0.01)
(1,200,0.01)
(10,20,0)
(20,50,0)
(50,200,0)
(10,20,0.01)
(20,50,0.01)
(50,200,0.01)
Average
N(BUY) N(SELL)
1795
1764
1771
1953
602
971
1264
1753
1797
1786
1978
403
974
1762
1723
1754
1747
1565
605
906
1229
1388
1721
1732
1540
392
951
1243
BUY
SELL
BUY>0
SELL>0
Std.dev
BUY
Std.dev
SELL
t-value
(BUY)
t-value
(SELL)
0.000040
0.000016
0.000201
0.000155
0.000277
0.000159
0.000216
0.000170
0.000126
0.000100
0.000132
0.000379
0.000081
0.000138
0.000156
0.000015
-0.000011
0.000177
0.000163
-0.000329
0.000137
0.000168
0.000180
0.000096
0.000051
0.000085
0.000110
0.000150
0.000128
0.000080
0.493593
0.486395
0.510446
0.517665
0.488372
0.496395
0.513449
0.516258
0.509182
0.516237
0.506572
0.488834
0.525667
0.516459
0.481138
0.474344
0.498569
0.508626
0.457851
0.475717
0.489015
0.505043
0.500291
0.508661
0.508442
0.479592
0.511041
0.514079
0.006362
0.006502
0.006474
0.006140
0.006572
0.006469
0.006497
0.006023
0.006509
0.006318
0.006061
0.007236
0.006591
0.006004
0.006954
0.006812
0.006834
0.007249
0.007336
0.007305
0.007163
0.007382
0.006796
0.006985
0.007348
0.008132
0.007535
0.007615
0.141058
0.012918
0.969223
0.753227
0.896895
0.602404
0.930553
0.804181
0.585132
0.449356
0.634425
1.044051
0.282051
0.641009
0.009849
-0.122952
0.842305
0.742229
-1.168737
0.497524
0.703284
0.792223
0.424754
0.195547
0.354823
0.274240
0.560480
0.520328
BUY-SELL
0.000025
0.000026
0.000024
-0.000009
0.000606
0.000022
0.000048
-0.000011
0.000030
0.000049
0.000047
0.000268
-0.000068
0.000010
0.000076
t-value
(BUY_SELL)
0.112728
0.117757
0.106345
-0.038243
1.580726
0.071483
0.180043
-0.044554
0.132579
0.216936
0.205628
0.568139
-0.225333
0.041554
Panel D
GBP
(1,10,0)
(1,20,0)
(1,50,0)
(1,200,0)
(1,10,0.01)
(1,20,0.01)
(1,50,0.01)
(1,200,0.01)
(10,20,0)
(20,50,0)
(50,200,0)
(10,20,0.01)
(20,50,0.01)
(50,200,0.01)
Average
N(BUY) N(SELL)
3051
3088
3058
3110
799
1335
1910
2534
3082
3017
3250
443
1311
2323
2732
2695
2725
2673
814
1214
1687
2081
2701
2766
2533
538
1189
1759
BUY
SELL
BUY>0
SELL>0
Std.dev
BUY
Std.dev
SELL
t-value
(BUY)
t-value
(SELL)
-0.000069
-0.000073
-0.000035
-0.000037
-0.000306
-0.000086
-0.000054
-0.000051
-0.000024
-0.000071
-0.000091
0.000181
-0.000198
-0.000129
-0.000075
0.000071
0.000066
0.000108
0.000107
0.000532
0.000410
0.000117
0.000052
0.000122
0.000068
0.000043
0.000122
0.000010
0.000127
0.000140
0.485742
0.488990
0.490844
0.497749
0.476846
0.486142
0.487435
0.494870
0.491888
0.491216
0.494462
0.528217
0.497330
0.496771
0.500732
0.504267
0.506422
0.514403
0.530713
0.514827
0.506817
0.503123
0.507590
0.506869
0.510857
0.513011
0.506308
0.521319
0.005586
0.005498
0.005412
0.005417
0.005967
0.005792
0.005621
0.005563
0.005678
0.005552
0.005538
0.006497
0.006121
0.005733
0.006384
0.006482
0.006552
0.006567
0.007736
0.007413
0.007210
0.006954
0.006299
0.006408
0.006496
0.008718
0.007706
0.007088
0.007492
-0.025403
0.257640
0.243072
-1.048464
-0.090443
0.096160
0.131174
0.341548
-0.011354
-0.159648
0.850613
-0.703369
-0.402312
1.011731
0.971209
1.281001
1.265103
2.690150
2.540949
1.127240
0.798486
1.372701
0.995855
0.789441
0.711580
0.419371
1.210238
BUY-SELL
-0.000139
-0.000139
-0.000143
-0.000145
-0.000838
-0.000496
-0.000171
-0.000103
-0.000146
-0.000139
-0.000133
0.000059
-0.000208
-0.000256
-0.000214
t-value
(BUY_SELL)
-0.885349
-0.880778
-0.911198
-0.916922
-2.816829
-2.091945
-0.857616
-0.584335
-0.924777
-0.884243
-0.841737
0.153679
-0.870697
-1.355289
Panel E
JPY
(1,10,0)
(1,20,0)
(1,50,0)
(1,200,0)
(1,10,0.01)
(1,20,0.01)
(1,50,0.01)
(1,200,0.01)
(10,20,0)
(20,50,0)
(50,200,0)
(10,20,0.01)
(20,50,0.01)
(50,200,0.01)
Average
N(BUY) N(SELL)
2959
2848
2784
2406
865
1417
1841
1973
2834
2776
2516
529
1346
1962
2824
2935
2999
3377
1012
1554
2165
2920
2949
3007
3267
760
1616
2683
BUY
SELL
BUY>0
SELL>0
Std.dev
BUY
Std.dev
SELL
t-value
(BUY)
t-value
(SELL)
-0.000263
-0.000172
-0.000161
-0.000319
-0.000234
-0.000177
-0.000187
-0.000305
-0.000084
-0.000148
-0.000297
-0.000160
-0.000317
-0.000378
-0.000229
0.000184
0.000275
0.000283
0.000158
0.000166
0.000271
0.000318
0.000112
0.000359
0.000295
0.000169
0.000273
0.000303
0.000070
0.000231
0.472795
0.484551
0.481322
0.482959
0.461272
0.472124
0.481803
0.480993
0.493296
0.486311
0.487281
0.497164
0.476226
0.484200
0.504603
0.516865
0.513838
0.515546
0.512846
0.509653
0.521478
0.515411
0.525263
0.518457
0.518825
0.501316
0.514851
0.516213
0.006290
0.006332
0.006276
0.006215
0.006733
0.006544
0.006388
0.006255
0.006621
0.006385
0.006804
0.007402
0.007191
0.006878
0.007444
0.007369
0.007392
0.007313
0.008302
0.008049
0.007854
0.007388
0.007113
0.007303
0.006934
0.008569
0.008279
0.007077
-0.247816
0.331650
0.398578
-0.563837
-0.037040
0.234402
0.205533
-0.448029
0.889606
0.479980
-0.439617
0.207821
-0.441662
-0.851746
2.588531
3.206063
3.280943
2.564914
1.665393
2.520591
3.129048
2.154859
3.751908
3.359283
2.613872
1.873132
2.724771
1.834439

32
BUY-SELL
-0.000447
-0.000448
-0.000445
-0.000476
-0.000400
-0.000448
-0.000504
-0.000417
-0.000444
-0.000443
-0.000466
-0.000432
-0.000619
-0.000448
-0.000460
t-value
(BUY_SELL)
-2.471828
-2.473824
-2.455932
-2.594886
-1.254654
-1.771575
-2.313284
-2.079444
-2.451961
-2.448379
-2.552634
-1.109669
-2.439845
-2.191660

The second moving average test of this part is the fix- length moving average (FMA)
rule which examines the 10 days holding returns after two moving averages crosses
each other. Replicating the similar procedure with FMA rule gave the following result
which is illustrated in Table IV. First of all, it is obvious that the sell signals of AUD,
CHF and JPY data are almost more than buy signals while EURs and GBPs
counterpart are contrary. This characteristic of FMA results is also in harmony with
the VMA results. To an extent, the feature could imply that three currencies AUD,
CHF and JPY tend to be in an overall down trend.
In contrast with VMA rules, introducing a band to FMA rules make equivocal results
for all examined currency pairs even with EUR data. In other words, trading rules
with 1% band sometimes can increase the returns or decrease them. Data of AUD
can be cited as an excellent example for this stimulus. Average returns from buy
signals of this currency without a band is much higher than the one with a band
(0.00077014 in comparison with 0.00000980), while introducing 1% band raises the
average returns from sell signals dramatically from 0.00005310 to 0.00014047. The
addition of one per cent band also hasan enormous impact on the standard
deviation.
All tests with 5 currency data do not reject the null hypothesis that returns from FMA
buy signals are equal to unconditional 10 day returns at 5% level using two tails. In
all cases, t- tests of buy signals are insignificant. The t- tests with sell signals have
various results. Fourteen over fourteen tests with AUD and EUR data denote that the
null hypothesis of equality between sell signals returns and unconditional 10 day
returns cannot be rejected at 95% the confident interval. By contrast, all tests with
JPY data imply that the differences between these returns are extremely significant
33

and the null hypothesis can be rejected at 5% level. For GBP data, there is only test
of (1,10, 0.01) rule is significant while the others are both insignificant. Nine over 14
tests with CHF data can reject the null hypothesis at the five per cent significance
level. For all data, the null hypothesis about the equality of buy signal returns and
sell signal returns do not be rejected at 5%. Among the examined data, only AUD
has higher returns from buy signals in comparison with returns from sell signals. In
the contrary, the average buy- sell value of the rest data is all negative.
Table IV
Standard test results for the Fix- length Moving Average rule

34

Panel A
AUD
(1,10,0)
(1,20,0)
(1,50,0)
(1,200,0)
(1,10,0.01)
(1,20,0.01)
(1,50,0.01)
(1,200,0.01)
(10,20,0)
(20,50,0)
(50,200,0)
(10,20,0.01)
(20,50,0.01)
(50,200,0.01)
Average
N(BUY)
273
265
274
262
192
219
228
243
269
264
261
93
153
234
N(SELL)
305
313
304
316
203
237
268
300
309
314
317
105
184
275
BUY
SELL
BUY>0
SELL>0
Std.dev
BUY
Std.dev
SELL
t-value
(BUY)
t-value
t-value
BUY-SELL
(SELL)
(BUY_SELL)
0.00071
0.000251
0.001459
0.001104
-0.00191
-0.0004
-0.00088
0.001314
0.000512
0.000811
0.000544
0.002596
-0.001
0.000341
0.00039
1.14E-05
-0.0004
0.000689
0.000313
-0.00074
-0.00068
-0.00077
0.000552
-0.00017
7.59E-05
-0.00015
0.001912
0.000499
0.000214
9.68E-05
0.501832
0.483019
0.492701
0.48855
0.489583
0.52968
0.45614
0.510288
0.475836
0.458333
0.490421
0.505376
0.464052
0.478632
0.547541
0.530351
0.539474
0.53481
0.536946
0.518987
0.518657
0.546667
0.524272
0.509554
0.536278
0.571429
0.532609
0.541818
0.022428
0.022536
0.024949
0.024408
0.025069
0.024501
0.029242
0.023256
0.024269
0.024387
0.023589
0.028361
0.026904
0.027067
0.022009
0.021932
0.019359
0.020187
0.024703
0.023114
0.020116
0.020721
0.020248
0.020193
0.021007
0.021396
0.022026
0.021029
0.26115
-0.06034
0.789515
0.527807
-1.3345
-0.46493
-0.78774
0.64907
0.12136
0.32711
0.141288
0.940934
-0.70942
0.001759
-0.24252
-0.55062
0.259558
-0.01923
-0.6595
-0.6675
-0.77569
0.157203
-0.37928
-0.19741
-0.37087
0.695962
0.093514
-0.08784
0.000698
0.000647
0.00077
0.000791
-0.00117
0.000281
-0.00011
0.000762
0.000682
0.000735
0.000696
0.000684
-0.00149
0.000127
0.000293
0.3651559
0.3373942
0.4026508
0.4123111
-0.5046444
0.1304982
-0.052381
0.3846368
0.3563588
0.383544
0.3629355
0.2094114
-0.5951078
0.0622805
Panel B
CHF
(1,10,0)
(1,20,0)
(1,50,0)
(1,200,0)
(1,10,0.01)
(1,20,0.01)
(1,50,0.01)
(1,200,0.01)
(10,20,0)
(20,50,0)
(50,200,0)
(10,20,0.01)
(20,50,0.01)
(50,200,0.01)
Average
N(BUY)
275
289
275
260
205
227
249
243
276
274
249
102
176
206
N(SELL)
303
289
303
318
218
248
272
308
302
304
329
101
205
285
BUY
SELL
BUY>0
SELL>0
Std.dev
BUY
Std.dev
SELL
t-value
(BUY)
t-value
t-value
BUY-SELL
(SELL)
(BUY_SELL)
-0.00034
-0.00075
-0.00049
-0.001
0.000219
-0.00058
0.000133
-0.00042
-5.4E-05
-0.00042
-0.00138
0.000463
-0.00096
-0.00108
-0.00048
0.002099
0.001777
0.001961
0.001479
0.001312
0.000721
0.002574
0.001734
0.002367
0.00202
0.00117
0.004175
0.00139
0.000477
0.001804
0.490909
0.467128
0.476364
0.469231
0.492683
0.45815
0.506024
0.493827
0.478261
0.474453
0.461847
0.5
0.448864
0.470874
0.557756
0.536332
0.544554
0.537736
0.541284
0.508065
0.536765
0.545455
0.546358
0.542763
0.531915
0.594059
0.536585
0.498246
0.021133
0.020922
0.019962
0.021105
0.023126
0.022762
0.021155
0.021278
0.02173
0.020551
0.022146
0.022846
0.021951
0.022458
0.024137
0.024477
0.025035
0.024051
0.023242
0.025332
0.022962
0.02372
0.023636
0.024583
0.023239
0.024107
0.024034
0.024281
0.648923
0.364396
0.539304
0.172245
0.913034
0.433534
0.944199
0.560328
0.85659
0.589296
-0.09651
0.757999
0.166736
0.104706
2.516555
2.223168
2.412364
2.097534
1.643595
1.344253
2.73002
2.259455
2.714007
2.460736
1.889763
2.395278
1.644228
1.258422

35
-0.00244
-0.00253
-0.00245
-0.00248
-0.00109
-0.0013
-0.00244
-0.00215
-0.00242
-0.00244
-0.00256
-0.00371
-0.00235
-0.00155
-0.00228
-1.2999002
-1.3468412
-1.3074072
-1.3144129
-0.4986063
-0.6296718
-1.2344848
-1.1123279
-1.2900549
-1.3008793
-1.3495601
-1.1733025
-1.0130312
-0.7538072

Panel C
EUR
(1,10,0)
(1,20,0)
(1,50,0)
(1,200,0)
(1,10,0.01)
(1,20,0.01)
(1,50,0.01)
(1,200,0.01)
(10,20,0)
(20,50,0)
(50,200,0)
(10,20,0.01)
(20,50,0.01)
(50,200,0.01)
Average
N(BUY)
181
176
177
195
123
151
157
185
180
176
192
60
111
179
N(SELL)
170
175
174
156
125
126
153
150
170
173
154
54
108
126
BUY
SELL
BUY>0
SELL>0
Std.dev
BUY
Std.dev
SELL
t-value
(BUY)
t-value
t-value
BUY-SELL
(SELL)
(BUY_SELL)
0.000585
0.002106
0.001567
0.001425
0.000207
8.1E-05
0.001581
0.001433
0.001604
0.001422
0.001337
0.001627
0.000796
0.001268
0.001217
0.000339
0.001842
0.001316
0.001471
0.001132
0.001995
0.000402
0.001593
0.001386
0.000977
0.000911
0.002151
0.002654
0.001301
0.001391
0.480663
0.539773
0.536723
0.553846
0.520325
0.503311
0.541401
0.524324
0.538889
0.528409
0.53125
0.483333
0.558559
0.581006
0.452941
0.514286
0.511494
0.538462
0.504
0.5
0.529412
0.553333
0.517647
0.50289
0.506494
0.555556
0.555556
0.539683
0.020522
0.020036
0.019708
0.01794
0.021493
0.02194
0.019902
0.018679
0.021195
0.019997
0.018752
0.020464
0.019355
0.018719
0.019961
0.020285
0.0207
0.022726
0.020613
0.019426
0.02208
0.025713
0.020416
0.021613
0.023174
0.019888
0.023513
0.023108
0.277309
1.216659
0.884623
0.833603
0.032707
-0.03633
0.843953
0.818644
0.915119
0.792518
0.771074
0.545595
0.323741
0.702298
0.118887
1.05005
0.722844
0.776698
0.519728
0.977948
0.149628
0.832211
0.757511
0.512184
0.446409
0.700883
1.230419
0.610976
0.000246
0.000264
0.000251
-4.6E-05
-0.00093
-0.00191
0.001179
-0.00016
0.000218
0.000445
0.000426
-0.00052
-0.00186
-3.3E-05
-0.00017
0.1104884
0.118492
0.1124795
-0.0206771
-0.3488562
-0.7599186
0.4972414
-0.0694689
0.0976861
0.1992225
0.1885464
-0.1336701
-0.6584409
-0.0136235
Panel D
GBP
(1,10,0)
(1,20,0)
(1,50,0)
(1,200,0)
(1,10,0.01)
(1,20,0.01)
(1,50,0.01)
(1,200,0.01)
(10,20,0)
(20,50,0)
(50,200,0)
(10,20,0.01)
(20,50,0.01)
(50,200,0.01)
Average
N(BUY)
317
326
307
313
178
209
248
284
305
300
326
64
151
243
N(SELL)
261
252
271
265
171
198
222
241
273
278
252
79
138
183
BUY
SELL
BUY>0
SELL>0
Std.dev
BUY
Std.dev
SELL
t-value
(BUY)
t-value
t-value
BUY-SELL
(SELL)
(BUY_SELL)
-0.0003
-0.0009
-0.00042
-0.00077
0.000819
-0.00082
4.82E-05
-0.00106
-0.00135
-0.0004
-0.00114
-0.00321
-0.00151
-0.00118
-0.00087
0.001203
0.00046
0.001041
0.000633
0.004088
0.000895
0.001384
0.000655
-4.1E-06
0.001042
0.000146
0.001477
0.000296
0.001018
0.001024
0.526814
0.509202
0.504886
0.520767
0.522472
0.502392
0.512097
0.5
0.501639
0.533333
0.521472
0.484375
0.496689
0.506173
0.467433
0.444444
0.442804
0.460377
0.532164
0.459596
0.468468
0.485477
0.43956
0.47482
0.460317
0.468354
0.463768
0.502732
0.018773
0.018378
0.017755
0.017447
0.018091
0.020878
0.017693
0.018864
0.018452
0.018699
0.017874
0.023672
0.020442
0.019829
0.019878
0.020396
0.020879
0.021252
0.022052
0.020315
0.021476
0.019816
0.020151
0.019893
0.020958
0.024866
0.023716
0.022205
0.378408
-0.15543
0.27347
-0.0394
1.041084
-0.0669
0.613179
-0.28313
-0.53906
0.283941
-0.37377
-1.01032
-0.48413
-0.35319
1.56258
0.945466
1.457607
1.109514
3.177684
1.150005
1.580888
1.077484
0.598744
1.476324
0.695615
0.996835
0.608611
1.191033
Panel E

36
-0.00151
-0.00136
-0.00146
-0.00141
-0.00327
-0.00172
-0.00134
-0.00172
-0.00134
-0.00144
-0.00129
-0.00469
-0.0018
-0.0022
-0.0019
-0.9218944
-0.8308697
-0.8947723
-0.8623861
-1.562858
-0.8855992
-0.7398531
-1.0053409
-0.8252303
-0.8869343
-0.787357
-1.4265107
-0.7840416
-1.1499934

JPY
N(BUY)
(1,10,0)
(1,20,0)
(1,50,0)
(1,200,0)
(1,10,0.01)
(1,20,0.01)
(1,50,0.01)
(1,200,0.01)
(10,20,0)
(20,50,0)
(50,200,0)
(10,20,0.01)
(20,50,0.01)
(50,200,0.01)
Average
N(SELL)
291
285
278
240
182
208
241
219
289
279
252
84
156
204
287
293
300
338
205
240
263
322
289
299
326
114
183
276
BUY
SELL
BUY>0
SELL>0
Std.dev
BUY
Std.dev
SELL
t-value
(BUY)
t-value
t-value
BUY-SELL
(SELL)
(BUY_SELL)
-0.0019
-0.00112
-0.00187
-0.00246
-0.00137
-0.00078
-0.00191
-0.00258
-0.00148
-0.00202
-0.00337
-0.00052
-0.00263
-0.00402
-0.002
0.002612
0.003357
0.002609
0.002107
0.002636
0.002531
0.002718
0.001263
0.003025
0.002468
0.001392
0.00225
0.003193
0.000616
0.002341
0.487973
0.477193
0.464029
0.475
0.489011
0.504808
0.481328
0.497717
0.470588
0.462366
0.456349
0.5
0.455128
0.470588
0.557491
0.546075
0.533333
0.54142
0.526829
0.529167
0.547529
0.543478
0.539792
0.531773
0.527607
0.45614
0.497268
0.5
0.020942
0.020296
0.021122
0.01973
0.022095
0.021429
0.021004
0.020484
0.022148
0.020642
0.020989
0.020672
0.022704
0.022193
0.021587
0.022115
0.021395
0.022292
0.021875
0.02199
0.022406
0.022223
0.020319
0.021832
0.02144
0.023434
0.023776
0.020539
0.262971
0.870666
0.280338
-0.16266
0.540384
0.978057
0.233054
-0.23575
0.591013
0.162315
-0.8356
0.738224
-0.22987
-1.18618
3.797172
4.424727
3.875499
3.676123
3.246981
3.427754
3.722301
2.894176
4.134781
3.757044
3.018346
2.246739
3.425345
2.191586
-0.00451
-0.00448
-0.00448
-0.00457
-0.00401
-0.00331
-0.00463
-0.00384
-0.00451
-0.00449
-0.00476
-0.00277
-0.00582
-0.00463
-0.00434
-0.5208174
-0.5218192
-0.5280763
-0.5695838
-0.3907064
-0.3485851
-0.5109044
-0.4670589
-0.5219841
-0.5287336
-0.5837406
-0.20087
-0.5354227
-0.5223622
Table V
Standard test results for the Trading range breakout rule
Panel A
AUD
(1,50,0)
(1,150,0)
(1,200,0)
(1,50,0.01)
(1,150,0.01)
(1,200,0.01)
N(BUY) N(SELL)
368
195
182
67
38
33
512
330
290
40
24
18
BUY
SELL
BUY>0
SELL>0
-0.000582
-0.000807
-0.000819
-0.001749
-0.003239
-0.003782
-0.001830
-0.000167
0.000237
0.000061
-0.000507
0.000777
0.000382
0.000131
0.470109
0.461538
0.467033
0.447761
0.447368
0.484848
0.484375
0.518182
0.510345
0.500000
0.583333
0.555556
Std.dev Std.dev
BUY
SELL
t-value
(BUY)
t-value
(SELL)
-1.475768
-1.490197
-1.462390
-1.878209
-2.606073
-2.833161
-0.551888
0.476457
0.068694
-0.438289
0.474611
0.193955
Std.dev Std.dev
BUY
SELL
t-value
(BUY)
t-value
(SELL)
0.006139
0.006342
0.006472
0.007844
0.007846
0.006851
0.514985
1.133388
0.700921
1.108185
1.386395
0.321645
0.671303
1.410753
1.438525
-0.081862
1.136533
1.105947
0.009711
0.009962
0.009891
0.014909
0.015235
0.015339
0.005818
0.005509
0.005416
0.006072
0.006300
0.004847
BUY-SELL
-0.000415
-0.001044
-0.000880
-0.001243
-0.004016
-0.004164
-0.001960
t-value
(BUY_SELL)
-0.788582
-1.499766
-1.207892
-0.806984
-1.999075
-1.844204
Panel B
CHF
(1,50,0)
(1,150,0)
(1,200,0)
(1,50,0.01)
(1,150,0.01)
(1,200,0.01)
Average
N(BUY) N(SELL)
443
220
173
47
27
20
499
327
287
71
44
39
BUY
SELL
BUY>0
SELL>0
0.000052
0.000427
0.000257
0.001030
0.001781
0.000385
0.000655
0.000094
0.000443
0.000492
-0.000199
0.001099
0.001140
0.000512
0.510158
0.531818
0.543353
0.574468
0.629630
0.600000
0.505010
0.535168
0.543554
0.577465
0.636364
0.641026
Panel C

37
0.007533
0.007869
0.008093
0.011683
0.012034
0.012725
BUY-SELL
-0.000042
-0.000017
-0.000235
0.001229
0.000682
-0.000755
0.000144
t-value
(BUY_SELL)
-0.090899
-0.026804
-0.341950
0.915075
0.390418
-0.384116

EUR
(1,50,0)
(1,150,0)
(1,200,0)
(1,50,0.01)
(1,150,0.01)
(1,200,0.01)
Average
N(BUY) N(SELL)
319
214
191
20
7
7
253
147
128
45
31
28
BUY
SELL
BUY>0
SELL>0
0.000422
0.000568
0.000470
0.000116
0.001562
0.001562
0.000783
-0.000128
-0.000362
-0.000415
0.000265
-0.000329
-0.000111
-0.000180
0.523511
0.537383
0.523560
0.500000
0.714286
0.714286
0.486166
0.496599
0.492188
0.533333
0.483871
0.500000
Std.dev Std.dev
BUY
SELL
t-value
(BUY)
t-value
(SELL)
0.005426
0.004683
0.004618
0.007723
0.004947
0.004947
1.049968
1.183626
0.922791
0.068543
0.614753
0.614753
-0.326631
-0.668603
-0.714688
0.251777
-0.284796
-0.097982
Std.dev Std.dev
BUY
SELL
t-value
(BUY)
t-value
(SELL)
0.004974
0.005145
0.005245
0.005854
0.003981
0.003654
1.076360
1.210129
0.975414
1.105422
0.314877
0.196870
3.244992
3.245970
2.656016
4.713685
1.923683
1.933713
t-value
(BUY)
t-value
(SELL)
BUY-SELL
t-value
(BUY_SELL)
0.599610
0.287059
-0.102809
0.141976
0.440754
-0.057028
1.745292
1.405054
0.659776
1.149004
2.760653
0.998598
-0.000375
-0.000470
-0.000372
-0.000748
-0.001880
-0.001153
-0.779260
-0.734496
-0.525373
-0.520591
-1.004458
-0.558886
0.007342
0.007963
0.007870
0.008133
0.009146
0.009062
BUY-SELL
0.000550
0.000930
0.000885
-0.000149
0.001891
0.001673
0.000963
t-value
(BUY_SELL)
0.981810
1.303358
1.163183
-0.083358
0.678575
0.594392
Panel D
GBP
(1,50,0)
(1,150,0)
(1,200,0)
(1,50,0.01)
(1,150,0.01)
(1,200,0.01)
Average
N(BUY) N(SELL)
499
279
233
28
14
10
357
188
158
43
30
26
BUY
SELL
BUY>0
SELL>0
0.000231
0.000374
0.000320
0.001182
0.000434
0.000303
0.000474
0.000988
0.001368
0.001210
0.004243
0.002035
0.002202
0.002008
0.515030
0.544803
0.545064
0.428571
0.285714
0.200000
0.504202
0.526596
0.525316
0.627907
0.566667
0.576923
0.008064
0.008981
0.009298
0.011774
0.010895
0.011427
BUY-SELL
-0.000758
-0.000994
-0.000891
-0.003061
-0.001601
-0.001899
-0.001534
t-value
(BUY_SELL)
-1.828424
-1.763273
-1.445712
-2.108766
-0.827599
-0.853992
Panel E
JPY
(1,50,0)
(1,150,0)
(1,200,0)
(1,50,0.01)
(1,150,0.01)
(1,200,0.01)
Average
N(BUY) N(SELL)
381
206
170
33
18
15
441
262
213
75
54
43
BUY
SELL
BUY>0
SELL>0
-0.000006
-0.000085
-0.000280
-0.000054
0.000491
-0.000326
-0.000043
0.000368
0.000386
0.000092
0.000694
0.002372
0.000827
0.000790
0.454068
0.456311
0.452941
0.424242
0.500000
0.466667
0.498866
0.496183
0.488263
0.533333
0.592593
0.581395
Std.dev Std.dev
BUY
SELL
0.005737
0.005890
0.006082
0.007093
0.008201
0.007805
0.007958
0.008942
0.008644
0.011937
0.012585
0.010889
With the trading range breakout, this dissertationtests three specific rules which the
exchange rates break out the resistance/support level within 50, 150, 200 days
respectively. In comparison with the VMA rule, it is easy to see that the number of
signals declines dramatically. T- test is utilized in order to test whether the returns
from trading rules is equal to the unconditional daily returns. The striking point is that
all t-value of CHF and EUR are not significant, so they cannot reject the null
hypothesis at 5% level. In the other way of expression, the difference between CHF,
EUR returns from TRB and their unconditional returns is not significant. By contrast,
38

there is some evidence of excess returns in the rest data. For JPY sell signals, there
is only one (1, 150, 0.01) test which can reject the null hypothesis with 95%
confidence interval. With AUD data, it seems that the excess returns can be earned
with using (1,150, 0.01) and (1,200,0.01) rules because the equality of conditional
and unconditional returns from buying are rejected at 5% level. Applying TRB on
selling GBP illustrates that excess returns can be generated. Four over six tests with
buy signals are absolutely significant and the rest are marginally significant. Taking
the GBP t- test of BUY-SELL into consideration, there is only test with (1,50,0.01)
rules which can reject the null hypothesis of equality at five per cent using a two- tail
test.
Analysing the efficiency of TRB signals shows that all TRB signals create almost
positive returns only with CHF data. More than 50% of buy and sell signals from all
examined rules provide positive returns. In contrast with CHF, TRB buy and sell
signals of the others sometimes have more negative returns than the positive one.
These features are presented as fractions of signals which have positive returns
(Column 6 and 7 in Table V).
Introducing a band into TRB rules works similarly to VMA rules. The addition of 1%
band has different impacts on the selected currency returns. While it increases the
average profitability of TRB rules with CHF, GBP and JPY data, it has abstruse
effects on the TRB with the rest data. Sell signals of AUD usinga 1% band have
higher average returns than the zero band one, but buy signals do adversely. In the
case of EUR, the addition of a 1% band has contrast impacts which are an increase
of mean returns with buy signals and a decrease with sell signals. Another worthy
point is that introducing a band of 1% reduces the number of signals considerably.
39

For example, the number of GBP buy signals from (1,200) rule declinesmore than 60
times from 127 signals without a band to 2 signals with a band. Moreover, in almost
tests except for (1, 200) the sell signal of AUD and (1, 150) and (1,200) the buy
signal, the introduction of 1% band raises the standard deviation of returns which
means that it makes the returns more scattered.
CHAPTER 6
IMPLICATION AND EXPLANATION
The results of wild bootstrapping variance ratio tests show that only USD/AUD and
USD/EUR pairs follow the random walk hypothesis, hence there are evidences of
weak form efficient in these markets. As a result, there is probably no way to create
excess returns from any speculate strategies these currencies.
The randomness of USD/ AUD exchange rates is due to the fact that this pair is
generally viewed as the proxy of growth by many currency market participants;
hence its movement is extremely sensitive to economic growth. Due to that reason,
speculative action of this currency pairs almost depends on news about global
growth. As the efficient market hypothesis stated, exchange rates should reflect all
relevant information. This hypothesis seems to be suitable for the Australian dollar.
When a currency is traded by news, it is impossible to predict its movements, so it
likely follows the random walk process.

40

Explanation of randomness of USD/EUR currency pair is different. Dollar and Euros

are the currencies which have the largest volume of trading in foreign exchange
markets (Euromoney, 2011). Therefore, this currency pair is traded most frequently,
so the number of speculators in this market is also extremely high. Unlike flow
traders, speculators only trade on news. If a market has an enormous amount of
speculators who trade by news, that market is probablymore efficient than the
others.
By contrast to EUR and AUD, all VR tests of GBP, JPY and CHF report that these
exchange rates reject the null hypothesis at 1% significance level. The results of JPY
and GBP from this dissertation support and confirm the findings of previous literature
such as Liu and He (1991) and Wright (2000).
In order to explain why these pairs VR tests do not support for EMH, the
characteristics of these currencies can be considered. JPY and CHF are often
viewed as safety heaven currencies by traders and hedge funds. Indeed, JPYs
demand often rises when there are risks of growth because its interest rate
extremely low. In fact, JPY is regularly used in carry trade which means borrowing
low-yield currencies and sell them to facilitate investment into high-yield currencies.
When there is bad news of economics growth, normally high-yield currencies will
tend to lose value, hence market participants will have to close their carry trade
position by purchasing JPY to pay back their debts. Due to that reason, trading this
currency may not follow the null hypothesis of weak form efficient. From a slightly
different perspective, CHF is often viewed as safety heaven when there are politics
risks. In a similar way of JPY expression, it is possible that CHF does not follow the
random walk hypothesis.
41

Making comparison between returns of three examined trading rules states that the
profitability of trading rules is various with different exchange rates. First of all, the
average returns from buy and sell signals of FMA are higher than the others in case
of AUD, CHF, and EUR data. For instance, TRB average return is-0.000850,
whereas VMA and FMA average return is 0.000006, 0.000243 respectively.By
contrast, with JPY and GBP, it seems to be that TRB rules are the most effective
rules among researched rules because average returns from TRB rules higher than
average returns from VMA and FMA. For example, with GBP data, average return
from TRB rules is 0.001241, in comparison with 0.000033 of VMA and 0.000076 of
FMA. It means that the average profit of TRB is 38 times higher than VMA and 16
times higher than FMA. Therefore, although numbers of VMA signals is absolutely
more than TRB (stated in Chapter 5), the effectiveness of these rules are adverse. It
can conclude that Fix-length variable average rules should be used to trade AUD,
CHF, EUR while GBP and JPY should be traded by applying signals from Trading
range break out rules.
In summary, all t-tests of equality between average returns from conditional buy
signals (from VMA, FMA rules) and unconditional returns are insignificant. It means
that the null hypothesis cannot be rejected and there is no evidence of abnormal
returns. About sells signals of VMA rules and FMA rules, the results show that it is
possible to earn excess returns in with specific rules. In more details, 11/14 tested
VMA trading rules prove that they can generate abnormal returns by selling
USD/JPY pair. On the other hand, it is possible to create excess profit by applying
FMA trading rules into selling signals, as 14/14 tests of FMA trading rules confirmed..

42

Besides, there are some evidences of VMA profitability in GBP and CHF data when
this dissertation studies returns of sell signals.
All of Trading range breakout rules do not create excess profit for USD/CHF and
USD/EUR pair. Only (1,150,0.01) rule proved that it can bring abnormal returns for
USD/JPY by selling this pair. The other striking point is that buying AUD in
accordance with (1,150,0.01) and (1,200,0.01) rules make unusual profit. According
to the t- test results, 4 over 6 examined TRB rules are supposed to earn excess
return by buy GBP/USD.
It is worthnoting that the evidence of trading rules profitability with AUD data is not
consistent with the variance ratio test. According to the wild bootstrapping VR tests,
USD/ AUD exchange rate follows random walk and supports the weak form of
market efficiency. Hence, it is impossible to earn abnormal return from trading this
currency. However, t- test of trading rules indicates that (1,150,0.01) and
(1,200,0.001) TRB rules can be used to make excess profit with AUD. The
inconsistency can be explained by transaction costs, which is ignored in this study.
In order to research thoroughly this issue, it is necessary to take trading cost into
account. Therefore, it is possible that after including transaction costs, the above
rules cannot generate abnormal returns for USD/AUD.
In the contrary with AUD, t- test results of the rest foreign exchange rates pair
confirm the results of variance ration test. USD/EUR can be cited as a good
example. As the variance ratio test stated, this exchange rate follows the random
walk process and there is no chance to earn abnormal returns through speculation.
Indeed, all t-tests of this exchange rate do not reject the null hypothesis of equality
43

between trading rules returns and unconditional returns. In other words, trading rules
profitability is not significant. In final, both variance ratio tests and t- test demonstrate
that USD/EUR follow the EMH. Because the randomness of GBP/USD, USD/JPY
and USD/CHF are concluded to be insignificant, the evidence of trading rule
profitability with these pairs isplausible.
Even though GBP/USD, USD/JPY and USD/CHF do not support for the random walk
hypothesis, there are still some specific trading rules which are not significant in
generating excess returns for these currency pairs. There are two principal reasons
which can beused to explain. Firstly, these specific trading rules are useless
themselves. Secondly, applying these simple rules is probably not efficient and
powerful enough to gain excess returns. It supposes that these rules should be
combined with patterns analysis or other indicators such as volume, relative strength
index (RSI), Stochastic Oscillators, Fibonacci waves, channels and lines namely.
CHAPTER 7
CONCLUSION
This dissertation investigated the weak form efficient of five currency pairs which are
USD/CHF, USD/JPY, USD/EUR, GBP/USD (from 01/05/1990 to 29/06/2012) and
USD/EUR (from 04/01/1999 to 29/06/2012) by two ways. The first method used is
the variance ratio test in combination with wild bootstrapping. The second one is
employing t-test to examine the profitability of Variable length moving average rules
44

(VMA), Fix- length moving average rules (FMA) and Trading range break out rules
(TRB). These rules are examinedwith a band of zero and band of 1%.
Overall, the results of variance ratio test are consistent with some previous studies.
In more details, they find that AUD and EUR support for the weak form of market
efficient while the rest does not. This dissertation provides enormous evidences of
generating excess returns by trading JPY in accordance with trading rules. Besides,
in this dissertation, there are some proofs of trading rules profitability with USD/CHF
and GBP/USD. In general, the results of variance ratio test are consistent with
results from t- test of trading rules profitability, except for AUD case. Furthermore,
some practical experiences of the foreign exchange market are also applied to
explain the drawn results from testing.
However, this dissertation still has little limitation which can be improved by other
further researches. The first drawback is that this study does not include transaction
costs since calculating returns of trading. As analysed in the implication chapter, this
issue perhaps is a reason for the difference between the results of two testing
methodologies. The second limited point refers to examining the moving average
rules and the trading range breakout rules by t- test.Although t- test is a good tool to
test the trading rules profitability, it cannot run a comprehensive test across all
technical trading rules. Based on the stated limitation, there are two main
suggestions for enhancing this research. Firstly, transaction costs should be taken
into account in order to measure precise returns from trading currency pairs.
Secondly, the results of this dissertation can be extended by applying bootstrap
technologies for calculating distribution of the null models such as: AR(1), GARCHM, EGARCH, a random walk with a drift as the process of Brock et.al (1992).
45

ACKNOWLEDGEMENTS
I am extremely grateful for time, help, instruction and comments of Prof Zhenya Liu
Department of Economics at the University of Birmingham- during the time which I
do this dissertation. Moreover, I also want to thank Dr James Reade Department of
Economics at the University of Birmingham- for his useful guides about econometrics
softwares.
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49

APENDIX 1
PERCENTAGE POINTS OF THE T DISTRIBUTION
Tail Probabilities
One Tail 0.10
Two Tails 0.20
0.05
0.10
0.025 0.01
0.05
0.02
0.005 0.001 0.0005

0.01
0.002 0.001
-------+---------------------------------------------------------+----D 1 | 3.078 6.314 12.71 31.82 63.66 318.3 637 | 1

E 2 | 1.886 2.920 4.303 6.965 9.925 22.330 31.6| 2
G 3 | 1.638 2.353 3.182 4.541 5.841 10.210 12.92| 3
R 4 | 1.533 2.132 2.776 3.747 4.604 7.173 8.610 | 4

50

E 5 | 1.476 2.015 2.571 3.365 4.032 5.893 6.869 | 5
E 6 | 1.440 1.943 2.447 3.143 3.707 5.208 5.959 | 6
S 7 | 1.415 1.895 2.365 2.998 3.499 4.785 5.408 | 7
8 | 1.397 1.860 2.306 2.896 3.355 4.501 5.041 | 8
O 9 | 1.383 1.833 2.262 2.821 3.250 4.297 4.781 | 9
F 10 | 1.372 1.812 2.228 2.764 3.169 4.144 4.587 | 10
11 | 1.363 1.796 2.201 2.718 3.106 4.025 4.437 | 11
F 12 | 1.356 1.782 2.179 2.681 3.055 3.930 4.318 | 12
R 13 | 1.350 1.771 2.160 2.650 3.012 3.852 4.221 | 13
E 14 | 1.345 1.761 2.145 2.624 2.977 3.787 4.140 | 14
E 15 | 1.341 1.753 2.131 2.602 2.947 3.733 4.073 | 15
D 16 | 1.337 1.746 2.120 2.583 2.921 3.686 4.015 | 16
O 17 | 1.333 1.740 2.110 2.567 2.898 3.646 3.965 | 17
M 18 | 1.330 1.734 2.101 2.552 2.878 3.610 3.922 | 18
19 | 1.328 1.729 2.093 2.539 2.861 3.579 3.883 | 19
20 | 1.325 1.725 2.086 2.528 2.845 3.552 3.850 | 20
21 | 1.323 1.721 2.080 2.518 2.831 3.527 3.819 | 21
22 | 1.321 1.717 2.074 2.508 2.819 3.505 3.792 | 22
23 | 1.319 1.714 2.069 2.500 2.807 3.485 3.768 | 23
24 | 1.318 1.711 2.064 2.492 2.797 3.467 3.745 | 24

51

25 | 1.316 1.708 2.060 2.485 2.787 3.450 3.725 | 25
26 | 1.315 1.706 2.056 2.479 2.779 3.435 3.707 | 26
27 | 1.314 1.703 2.052 2.473 2.771 3.421 3.690 | 27
28 | 1.313 1.701 2.048 2.467 2.763 3.408 3.674 | 28
29 | 1.311 1.699 2.045 2.462 2.756 3.396 3.659 | 29
30 | 1.310 1.697 2.042 2.457 2.750 3.385 3.646 | 30
32 | 1.309 1.694 2.037 2.449 2.738 3.365 3.622 | 32
34 | 1.307 1.691 2.032 2.441 2.728 3.348 3.601 | 34
36 | 1.306 1.688 2.028 2.434 2.719 3.333 3.582 | 36
38 | 1.304 1.686 2.024 2.429 2.712 3.319 3.566 | 38
40 | 1.303 1.684 2.021 2.423 2.704 3.307 3.551 | 40
42 | 1.302 1.682 2.018 2.418 2.698 3.296 3.538 | 42
44 | 1.301 1.680 2.015 2.414 2.692 3.286 3.526 | 44
46 | 1.300 1.679 2.013 2.410 2.687 3.277 3.515 | 46
48 | 1.299 1.677 2.011 2.407 2.682 3.269 3.505 | 48
50 | 1.299 1.676 2.009 2.403 2.678 3.261 3.496 | 50
55 | 1.297 1.673 2.004 2.396 2.668 3.245 3.476 | 55
60 | 1.296 1.671 2.000 2.390 2.660 3.232 3.460 | 60
65 | 1.295 1.669 1.997 2.385 2.654 3.220 3.447 | 65
70 | 1.294 1.667 1.994 2.381 2.648 3.211 3.435 | 70

52

80 | 1.292 1.664 1.990 2.374 2.639 3.195 3.416 | 80
100 | 1.290 1.660 1.984 2.364 2.626 3.174 3.390 | 100
150 | 1.287 1.655 1.976 2.351 2.609 3.145 3.357 | 150
200 | 1.286 1.653 1.972 2.345 2.601 3.131 3.340 | 200
-------+---------------------------------------------------------+----Two Tails 0.20
One Tail 0.10
0.10
0.05
0.05
0.02
0.025 0.01
0.01
0.002 0.001
0.005 0.001 0.0005
Tail Probabilities

53

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Table of Contents

Dissertation of MSc International

TESTING EFFICIENCY OF FIVE MAJOR CURRENCY

TESTING EFFICIENCY OF FIVE MAJOR CURRENCY MARKETS BY A WILD

TESTING EFFICIENCY OF FIVE MAJOR CURRENCY MARKETS BY A WILD

MSc International Money and Banking

TESTING EFFICIENCY OF FIVE MAJOR CURRENCY MARKETS BY A WILD

TESTING EFFICIENCY OF FIVE MAJOR CURRENCY MARKETS BY A WILD

The structure of this dissertation is organised as follows: Literature of thewild

TESTING EFFICIENCY OF FIVE MAJOR CURRENCY MARKETS BY A WILD

2.2. Literature of the wild bootstrapping variance ratio test

MSc International Money and Banking

TESTING EFFICIENCY OF FIVE MAJOR CURRENCY MARKETS BY A WILD

It is necessary to review the literature of this bootstrap method. Bootstrapping is

TESTING EFFICIENCY OF FIVE MAJOR CURRENCY MARKETS BY A WILD

2.3. Literature of technical trading rules testing

As stated above, testing profitability of technical trading rules can be considered as

TESTING EFFICIENCY OF FIVE MAJOR CURRENCY MARKETS BY A WILD

TESTING EFFICIENCY OF FIVE MAJOR CURRENCY MARKETS BY A WILD

MSc International Money and Banking

TESTING EFFICIENCY OF FIVE MAJOR CURRENCY MARKETS BY A WILD

3.2. Technical trading rules

TESTING EFFICIENCY OF FIVE MAJOR CURRENCY MARKETS BY A WILD

TESTING EFFICIENCY OF FIVE MAJOR CURRENCY MARKETS BY A WILD

TESTING EFFICIENCY OF FIVE MAJOR CURRENCY MARKETS BY A WILD

3.3. Methodologies of testing

3.3.1. Variance Ratio test with Bootstrap methodology

random walk, the variance of the

- period difference equals q times the variance of

MSc International Money and Banking

TESTING EFFICIENCY OF FIVE MAJOR CURRENCY MARKETS BY A WILD

is an unbiased estimator of the variance of the

exchange rate and

is unbiased estimator of the variance of the 1 st difference of

In particular, this dissertation uses a wild bootstrapping method of Kim (2006) to

MSc International Money and Banking

TESTING EFFICIENCY OF FIVE MAJOR CURRENCY MARKETS BY A WILD

distribution of the test statistics

. The bootstrap p- values are

). The detail process is presented clearly by Kim (2006).

MSc International Money and Banking

TESTING EFFICIENCY OF FIVE MAJOR CURRENCY MARKETS BY A WILD

Case: Band of zero

MSc International Money and Banking

TESTING EFFICIENCY OF FIVE MAJOR CURRENCY MARKETS BY A WILD

Dt= +1 if St >MA(n) or MA(n1) > MA(n2)

Dt= +1 if St >1.01 x MA(n) or MA(n1) > 1.01x MA(n2)

average in n2 days with n1<n2.

Rt=Dt x (ln (St+1)-ln (St) 1/260 (it it*))

TESTING EFFICIENCY OF FIVE MAJOR CURRENCY MARKETS BY A WILD

it: annual interest rate of domestic currency at date t

Dt= Dt if average of Dt within 10 days is equal to 0

R_10t= Dt x (ln (St+10)-ln (St) 10/260 (it it*))

TESTING EFFICIENCY OF FIVE MAJOR CURRENCY MARKETS BY A WILD

Dt= +1 if St > Max ( St, St+1, , St+1)

Rt= Dt x (ln (St+1)-ln (St) 1/260 (it it*))

Let denote Dt is the dummy variable of TRB at date t.

t- value Buy (Sell) =

is respectively the unconditional mean return and the number of observations.

is the estimated variance for entire sample.

MSc International Money and Banking

TESTING EFFICIENCY OF FIVE MAJOR CURRENCY MARKETS BY A WILD

t- value Buy- Sell=