Date of Graduation


Document Type



The dissertation studies the profitability of technical trading rules in foreign exchange markets, giving special emphasis to emerging economies, and explores the link between this profitability and the central bank intervention activity. The first chapter presents the motivation and defines the scope. The second chapter reviews the literature related to the subject. The third chapter applies a moving average trading rule to 28 exchange rate series in the post-Bretton Woods period. Currencies of 14 developed and 14 emerging countries are considered. The trading rule produces significant excess returns for 27 exchange rates. The emerging markets included in this study have higher exchange rate variability compared to the developed ones. It is expected that trading emerging countries' currencies will produce higher returns. The opposite result is found. An explanation to the puzzle of higher returns from developed economies is found in the interest rate differential. When the trading rule is modified to account for the interest rate differential, returns from emerging country currencies are significantly increased. The link between official intervention and trading rule profitability is explored in the fourth chapter. Due to the lack of public intervention data for the 28 countries studied, a proxy for intervention is constructed based on changes in foreign exchange reserves of the central banks. For 21 countries, the trading rule returns are significantly higher during the months when the central banks use a “leaning against the wind” type of intervention (LAWI) than during the rest of the months. The study also estimates the cost of intervention for the central banks. The fifth chapter uses actual intervention data from the emerging Mexican economy to test if LAWI is causing the trading rule returns. Positive and significant daily returns are found from 1992 to 2000. When the days of central bank intervention are removed from the sample, the trading rule returns disappear. The Mexican Central Bank used three different intervention strategies during the period analyzed. The magnitude of the daily returns is directly linked to the degree of predictability of the intervention policy. The sixth chapter summarizes the findings and suggests avenues of future research.