The Impact of Central Bank Intervention on the Profitability of Technical Trading Rules in the Foreign Exchange Market in Kenya

Abstract

This study examined the impact of central bank intervention on the profitability of technical trading rules. The study period was from July 1, 2007 to June 30, 2012. The study employed simple moving average rules with and without interest rate cost. Data was analyzed with central bank intervention data then the intervention data were removed and the data analyzed again. Then paired sample t-test was applied to profits with and without interest cost and to profits with and without central bank intervention. The general result that central bank intervention in the market reduces the profitability of technical trading rules is interesting. This result means that central bank intervention in the market can reduce speculation in the market. However, this can only be the case when the profits after intervention are not significant. As the results demonstrate above, indeed profits decline but they are still significant. Therefore central bank intervention has not been successful in eliminating speculation in the market. The results also show that central bank intervention reduces the volatility of technical trading profits. Therefore, when the central bank intervenes in the market speculators earn relatively low profits simply because exchange rate volatility has declined. This finding is supported by not only a decreased standard deviation but also a lower kurtosis. The impact of central bank intervention in the market is only felt at the monthly trading interval. Thus, intervention in the foreign exchange market does not significantly reduce profitability of technical trading rules and hence speculation. Thus, the foreign exchange market is subject to large exchange rate movements with or without intervention by the central bank. The results show that including interest rate costs does not eliminate the profitability of technical trading. Also technical trading appears more profitable during periods of high volatility. v