cocoa futures prices, with only 12.2% generating positive net excess returns and hardly any statistically significant forecasting power. The large difference in the performance of technical trading is surprising, because the underlying asset in both markets is more or less the same. Our findings may be attributed to a combination of the demand/supply mechanism in the cocoa market and an accidental influence of the Pound-Dollar exchange rate. Due to a spurious relation between the level of the Pound-Dollar exchange rate and the excess demand/supply mechanism in the cocoa market, especially in the period 1983:1-1987:12, trends caused by the demand/supply mechanism were reinforced in the LIFFE cocoa futures price, but the same trends were weakened in the CSCE cocoa futures price. Many technical trading rules are able to pick up these sufficiently strong trends in the LIFFE cocoa futures but almost none of them pick up the weaker trends in the CSCE cocoa futures.
The chapter is organized as follows. In section 2.2 we describe our data set and the construction of a long, continuous time series of 15 years out of 160 different (overlapping) futures contracts of 18 months. Section 2.3 gives an overview of the 5350 trading rules we apply; the parameterizations of these rules can be found in Appendix B. In section 2.4 the performance measure, i.e. the excess return net of transaction costs generated by the trading rules, is calculated. Section 2.5 focuses on the economic performance as well as the statistical significance of the predictability of returns by technical trading rules. The statistical tests are performed first under the assumption of iid returns but later also by correcting for dependence in the data. This is done by estimating exponential GARCH models with a dummy for the trading position in the regression equation, but also by applying bootstrap techniques, the results of which are presented in section 2.6. In section 2.7 a possible explanation of the large differences in the performance between CSCE and the LIFFE cocoa futures prices is given. Finally, section 2.8 concludes.