The cost of technical trading rules in the Forex market: A utility-based evaluation [An article from: Journal of International Money and Finance]

This digital document is a journal article from Journal of International Money and Finance, published by Elsevier in 2006. The article is delivered in HTML format and is available in your Amazon.com Media Library immediately after purchase. You can view it with any web browser.

Description:
We compute the opportunity cost for rational risk averse agents of using technical trading rules in the foreign exchange rate market. We decompose this opportunity cost into two parts: (i) a cost related to the misallocation of wealth, which increases with the investor's level of risk aversion (allocational cost); and (ii) a cost related to the investor's erroneous belief regarding the sign of the expected excess return (expectational cost). We find that even for low levels of risk aversion the opportunity cost of using chartist rules tends to be prohibitively high.