Where Economics And Technical Analysis Meet
Christopher Neely Of The Federal Reserve
by Jayanthi Gopalakrishnan
Once in a while, we hear something coming out of the Federal Reserve we just don't expect. In this case, we heard about a technical analysis-receptive individual -- an economist, to boot! Christopher Neely is a research officer with the Federal Reserve Bank of St. Louis, where he has worked since receiving his doctorate from the University of Iowa in 1993. His research has been primarily in empirical international finance, but he has published papers on technical trading rules, foreign exchange intervention, and intertemporal asset pricing. In recent times, he has begun to research options markets.Neely is an associate editor at Quantitative Finance, Applied Economics, and co-editor of Journal of International Financial Markets, Institutions And Money. STOCKS & COMMODITIES Editor Jayanthi Gopalakrishnan spoke with Neely via telephone on July 7, 2004.
Technical trading fascinated me because it seemed mysterious, and I was interested in how I could make money from it.
How did you get interested in the work that you do?
I got interested in technical analysis when I attended a seminar, given by a guy named Blake LeBaron. I think it was 1991 or so. I became interested, but I didn't do anything about it until about 1995, when a colleague of mine suggested we work together on a study to develop technical trading rules with genetic programming.
What is genetic programming?
It is a type of artificial intelligence that is related to genetic algorithms. It uses the principles of natural selection and recombination to develop successful trading rules. We probably started working on that project in 1995.
Why did you get interested in the first place?
Technical trading rules fascinated me because they seemed mysterious, and like everybody else, I was interested in how I could make money from these things.
Did you face any resistance from your colleagues, considering technical analysis is generally viewed as some sort of voodoo?
We were afraid of just that when we first started working on technical analysis. We were afraid we'd get a lot of resistance, and certainly I've heard some stories from other people that they had. But by the time we started work on the project, I think the evidence had started to accumulate that technical analysis could be profitable, at least in some markets. So I've been lucky; I've never really run into much of that criticism myself.
That's good! Which markets would those be?
Well, it's used in just about all markets that I know of, but what I
meant was that academics had found evidence that it worked in at least
some markets, and it was evidence that was difficult to refute. So if you
were to take some simple moving average rules and use them on -- for instance
-- US dollar exchange rates over the past 30 years, it would be difficult
to refute that there are significant excess returns that can't be explained
by risk or transactions costs.
...Continued in the September 2004 issue of Technical Analysis of STOCKS & COMMODITIES
Excerpted from an article originally published in the September 2004 issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 2004, Technical Analysis, Inc.
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