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Can risk explain the profitability of technical trading in currency markets?

Academic studies show that technical trading rules would have earned substantial excess returns over long periods in foreign exchange markets. However, the approach to risk adjustment has typically been rather cursory. We examine the ability of a wide range of models: CAPM, quadratic CAPM, downside risk CAPM, C‐CAPM, Carhart’s 4‐factor model, an extended C‐CAPM with durable consumption, Lustig‐Verdelhan (LV) factors, volatility, skewness and liquidity to explain these technical trading returns. No model plausibly accounts for technical profitability in the foreign exchange market.

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