Predictable and Profitable Price Patterns : Evidence from U.S. Interest Rates

A growing number of studies have called into question the validity of the random walk and efficient markets hypothesis. The occurrence of seasonal anomalies such as the January, Monday and holiday effects, the observation that specific mutual funds continue to outperform or underperform a market index, and the finding that technical trading rules can predict price movements, all constitute violations of the random walk and/or the efficient markets hypothesis. Many of these studies assess whether, after adjusting for transactions costs and possibly risk factors, systematic profits can be made. The results on profitability are mixed, with some studies concluding that profits can be made.This paper provides evidence from the Eurodollar interest rate futures contract of predictable price movements that generate profits. There are two noteworthy features of this paper. First, the evidence provided here regarding the profitability of a trading rule based on a predictable price pattern is quite strong. Second, the trading rule used here to generate profits is linked to a fundamental reaction to economic news, unlike the technical trading rules or rules based on calendar day anomalies, that have been used in previous studies