Sign predictions of exchange rate changes: Charts as proxies for Bayesian inferences

Sign Predictions of Exchange Rate Changes: Charts as Proxies for Bayesian Inferences. - One recurrent and controversial feature of high-frequency exchange rate returns is the apparent profitability of simple chartist rules. This paper attests the relevance of these rules for predicting the upward and downward tendencies in speculative prices. First, it is shown by means of a variant to the standard Markov switching model that there are swings in the mean for various weekly exchange rate returns. The paper proceeds by showing that certain chartist rules detect these regime shifts quite accurately. As such, these rules can be interpreted as workable proxies for the Bayesian filtering rule of Hamilton.