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Random walk currency futures profits revisited

Kuntara Pukthuanthong (College of Business Administration, San Diego State University, San Diego, California, USA)
Lee R. Thomas III (Allianz Global Investors, Newport Beach, California, USA)
Carlos Bazan (Computational Science Research Center, San Diego State University, San Diego, California, USA)

International Journal of Managerial Finance

ISSN: 1743-9132

Article publication date: 3 July 2007

Abstract

Purpose

Recent research indicates that the random walk hypothesis (RWH) approximately describes the behavior of major dollar exchange rates during the post‐1973 float. The present analysis seeks to examine the profitability of currency futures trading rules that assume that spot exchange rates can be adequately modeled as a driftless random walk.

Design/methodology/approach

Two random walk currency futures trading rules are simulated over all available data from the period 1984‐2003. In both cases, the investor buys currencies selling at a discount and sells those selling at a premium, as the RWH implies. The two rules differ only in the way they allocate the hypothetical investor's resources among long and short foreign currency positions.

Findings

Results show that an investor who used these trading strategies over the past decade would have enjoyed large cumulative gains, although periods of profit were interrupted by periods of substantial loss.

Research limitations/implications

The findings encourage the hope that profitable random‐walk‐based strategies for currency futures trading can be devised. The simulation results have important implications for those willing to hedge, borrowers, and speculators.

Originality/value

This paper provides evidence that purchasing futures contracts on currencies priced at a discount and selling futures contracts priced at a premium has generally been a profitable trading strategy during the last two decades of floating exchange rates.

Keywords

Citation

Pukthuanthong, K., Lee R. Thomas III, L.R.T. and Bazan, C. (2007), "Random walk currency futures profits revisited", International Journal of Managerial Finance, Vol. 3 No. 3, pp. 263-286. https://doi.org/10.1108/17439130710756916

Publisher

:

Emerald Group Publishing Limited

Copyright © 2007, Emerald Group Publishing Limited