A paper titled “Macroeconomic conditions and technical trading profitability in foreign exchange markets” and co-authored by Henry Platt Bristol Professor of Economics Ann Owen and Brent Palmer ’11 has been published by Applied Economics Letters. The article was a result of work that Palmer did last year as part of his senior honors thesis which Owen supervised.
The co-authors developed a model that simulates the returns from some simple technical trading strategies and shows that macroeconomic conditions such as inflation affect the profitability of these strategies in several different foreign exchange markets. High inflation creates greater opportunities for profits. If markets are efficient, technical trading rules should not be profitable. A technical trading strategy relies on publicly available information about past behavior and, in an efficient market, traders should not be able to exploit this widely available information for profit. The authors found that these strategies can be profitable, but that their profitability is declining over time.