This paper examines the conventional monetary equation of exchange rate determination. Under certain exogeneity conditions, one can write the price level, at home and abroad, as the ratio of the nominal money supply to the demand for real money balances. Then, since the exchange rate is the domestic price of foreign exchange, one can equate the exchange rate to the ratio of domestic to foreign prices. This then allows one to write, and estimate, the exchange rate as a function of the money supply differential, income differential and interest rate differential. If the domestic and foreign money demand errors are autocorrelated, and if deviations from purchasing power parity are autocorrelated, tests based on the above model may be invalid. Only if all autoregressive parameters are equal will test results be valid. A full information maximum likelihood procedure is used to estimate and test the assumptions necessary for the conventional procedure to be correct. Finally, two alternative models of exchange rate determination are considered to illustrate the importance of introducing the error terms at the beginning of the analysis.

Previous studies of technical analysis statistical tests of risk-adjusted profits from trading rules - the X-test selected trading rules equally-weighted portfolios of currencies, with rules tailored for each currency variably-weighted portfolios of currencies, with rules tailored for each currency speculating on indexes of currencies speculating with a portfolio upgrade approach comparing the performances of technical trading strategies the stability of speculative profits implications for the theory and practice of financial economics implications for policymakers.