Relationship Between Profitability of Technical Trading Rules and Central Bank Intervention on Foreign Exchange Market in Kenya

Abstract

This study examined the relationship between Profitability of TTRsand CB intervention on Foreign Exchange Market in Kenya. The study duration was from July 1, 2011 to June 30, 2016. The study employed SMA rules factoring in and out the interest expense. Data was then analyzed using intervention of CB and then the intervention was removed and data was analyzed again. The harmonized sample t- test was used to profits from TTRs with and without interest rate costs and to with and without CBinvolvement profits. The general result proved that profitability of TTRs is reduced when central bank’s intervene on exchange markets. This result means when central bank is in the market, the speculators profits are reduced but not completely eliminated. The results also indicate that CB involvement decreases the volatility of profits from TTRs. From the finding also shows that not all CB involvement periods get to be know by traders but those days it's know speculators do not earn excessive return unlike on non-intervention periods. The relationship between profitability of TTRs and CB involvement shows that mean variation in profits are both negative and are only statistically significant at 5% level from each other at a weekly interval. This means therefore that CB involvement in the FOREX market reduces profitability of TTRs significantly.