Relevance of Technical and Fundamental Analyses in Currency Portfolio Management

Abstract

This document examines the out-of sample behavior of five popular technical rules and two macroeconomic fundamental variables. In order to measure the economic value of the trading strategies, the study measures the Sharpe ratios of currency portfolio investments based on the combination of both macroeconomic variables and technical indicators. The analysis is based on 21 currencies of both developed and emerging markets over the period 2001–2011. The study computes returns and explicitly takes into account the transaction costs by using bid and asks prices. It shows that combining the two types of information, fundamental and technical, improves the risk adjusted performance of the investment strategies. However, it indicates that majority of the chartist strategies do not outperform, and sometimes, small variations in the parameters of technical indicators can produce substantial differences in the returns. The study also shows that the pertinence of the type of information varies over time.