Journal of international money and finance vol:25 issue:7 pages:1072-1089
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. (c) 2006 Elsevier Ltd. All rights reserved.