Between the 29th November 2015 and 25th April 2016, 133 Retail FX traders responded to a request to take part in an anonymous online survey, which asked 14 questions about the way they trade. The purpose of the survey was to inform research looking at effective ways to help improve the profitability and reduce the risk of the Retail FX trader. Over fifty percent of the respondents stated they had been trading for more than four years. The survey found that more than half of the traders had experienced account-closing losses with nearly 40% have experienced this at least twice. The most common cause of these losses were the use of trades sizes that were too large, with nearly half of all traders stating this was the cause of their worst trade. Additional ‘worst trade’ factors were identified as allowing losing trades to run for too long and the lack of automated stop loss levels. Less than a quarter of traders identified their ‘system’ as being the cause of either their best or worst trades, with ‘best’ trades being attributed to significant market moves over 40% of the time closely followed by allowing winning trades to run for a long time. Only a third of traders said they regularly checked the bid-ask spread before placing a trade with only a quarter ever checking the interest swap charges, despite nearly half of all traders saying they kept trades open overnight. When asked what single area a trader would like to improve, most traders focused on physiological issues rather than system ones. The purpose of this paper is to share these results with the Retail Trader community and to seek further input as to the best way to help address some of the identified issues.
{"title":"Retail FX Trader Survey Results","authors":"C. Davison","doi":"10.2139/SSRN.2795927","DOIUrl":"https://doi.org/10.2139/SSRN.2795927","url":null,"abstract":"Between the 29th November 2015 and 25th April 2016, 133 Retail FX traders responded to a request to take part in an anonymous online survey, which asked 14 questions about the way they trade. The purpose of the survey was to inform research looking at effective ways to help improve the profitability and reduce the risk of the Retail FX trader. Over fifty percent of the respondents stated they had been trading for more than four years. The survey found that more than half of the traders had experienced account-closing losses with nearly 40% have experienced this at least twice. The most common cause of these losses were the use of trades sizes that were too large, with nearly half of all traders stating this was the cause of their worst trade. Additional ‘worst trade’ factors were identified as allowing losing trades to run for too long and the lack of automated stop loss levels. Less than a quarter of traders identified their ‘system’ as being the cause of either their best or worst trades, with ‘best’ trades being attributed to significant market moves over 40% of the time closely followed by allowing winning trades to run for a long time. Only a third of traders said they regularly checked the bid-ask spread before placing a trade with only a quarter ever checking the interest swap charges, despite nearly half of all traders saying they kept trades open overnight. When asked what single area a trader would like to improve, most traders focused on physiological issues rather than system ones. The purpose of this paper is to share these results with the Retail Trader community and to seek further input as to the best way to help address some of the identified issues.","PeriodicalId":413816,"journal":{"name":"Econometric Modeling: International Financial Markets - Foreign Exchange eJournal","volume":"48 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2016-06-15","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"129038264","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
The objective of this paper is to analyze what are the main determinants of the exchange rate risk premium (ERP). The empirical case is conducted for the daily Mexican peso-USD exchange rate for a sample period from 2007 until 2015. According to the results the ERP is influenced by several financial variables which are the VIX, a carry trade index, the EMBI and the forward premium obtained from derivatives' transaction orders. These results are in line with previous results in the literature that have proven that exchange rate premiums are influenced by several financial variables, which are usually considered as 'proxies' of risk.
{"title":"Exchange Rate Risk Premium: An Analysis of Its Determinants for the Mexican Peso-USD","authors":"G. Benavides","doi":"10.2139/ssrn.2808249","DOIUrl":"https://doi.org/10.2139/ssrn.2808249","url":null,"abstract":"The objective of this paper is to analyze what are the main determinants of the exchange rate risk premium (ERP). The empirical case is conducted for the daily Mexican peso-USD exchange rate for a sample period from 2007 until 2015. According to the results the ERP is influenced by several financial variables which are the VIX, a carry trade index, the EMBI and the forward premium obtained from derivatives' transaction orders. These results are in line with previous results in the literature that have proven that exchange rate premiums are influenced by several financial variables, which are usually considered as 'proxies' of risk.","PeriodicalId":413816,"journal":{"name":"Econometric Modeling: International Financial Markets - Foreign Exchange eJournal","volume":"50 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2016-06-11","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"130695682","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This study empirically examines the effect of equity market illiquidity on the excess returns of currency momentum and carry trade strategies. Results show that equity market illiquidity explains the evolution of currency momentum strategy payoffs, but not carry trade. Returns on currency momentum are low following months of high equity market illiquidity. However, in the recent decade, illiquidity positively predicts the associated payoffs. The findings withstand various robustness checks and are economically significant, approximating in value to one-third of average monthly profits.
{"title":"Currency Momentum, Carry Trade, and Market Illiquidity","authors":"Vitaly Orlov","doi":"10.2139/ssrn.2480429","DOIUrl":"https://doi.org/10.2139/ssrn.2480429","url":null,"abstract":"This study empirically examines the effect of equity market illiquidity on the excess returns of currency momentum and carry trade strategies. Results show that equity market illiquidity explains the evolution of currency momentum strategy payoffs, but not carry trade. Returns on currency momentum are low following months of high equity market illiquidity. However, in the recent decade, illiquidity positively predicts the associated payoffs. The findings withstand various robustness checks and are economically significant, approximating in value to one-third of average monthly profits.","PeriodicalId":413816,"journal":{"name":"Econometric Modeling: International Financial Markets - Foreign Exchange eJournal","volume":"27 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2016-06-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"127999271","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Exchange traded funds (ETFs) are a multi-trillion dollar market that epitomizes financialization due to its recent growth. This study examines the behavior of U.S. listed currency hedged ETF investors towards changes in the underlying benchmark and foreign exchange rate from July 2011 to November 2015 using a panel VAR approach. We find that investors are able to anticipate changes in future exchange rates and invest in currency hedged ETFs prior to changes. Granger-causality tests confirm that these investors proactively trade before large real exchange rate movements. These results suggest that the use of financial instruments such as ETFs to hedge against exchange rate volatility may have itself become a source of volatility, which have implications for the further financialization of the ETF industry.
{"title":"Are US-Dollar-Hedged-ETF Investors Aggressive on Exchange Rates? A Panel VAR Approach","authors":"Corey A. Shank, Andre C. Vianna","doi":"10.2139/ssrn.2782082","DOIUrl":"https://doi.org/10.2139/ssrn.2782082","url":null,"abstract":"Exchange traded funds (ETFs) are a multi-trillion dollar market that epitomizes financialization due to its recent growth. This study examines the behavior of U.S. listed currency hedged ETF investors towards changes in the underlying benchmark and foreign exchange rate from July 2011 to November 2015 using a panel VAR approach. We find that investors are able to anticipate changes in future exchange rates and invest in currency hedged ETFs prior to changes. Granger-causality tests confirm that these investors proactively trade before large real exchange rate movements. These results suggest that the use of financial instruments such as ETFs to hedge against exchange rate volatility may have itself become a source of volatility, which have implications for the further financialization of the ETF industry.","PeriodicalId":413816,"journal":{"name":"Econometric Modeling: International Financial Markets - Foreign Exchange eJournal","volume":"76 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2016-05-15","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"130229233","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
In this paper, we analyse the relationship between the currency carry return and volatility and liquidity risk factors. We find that both categories of risk factors are relevant to understanding and explaining carry return, with an outperformance for volatility ones especially the global FX volatility risk factor. Consistent with the poor performance of currency carry trades during high FX volatility regime, we also show that the well-established negative slope coefficient in the Fama regression tends to be more positive and even above unity in times of high FX volatility. The paper, overall, contributes to the risk-based solution of the forward premium bias puzzle.
{"title":"The Forward Premium Bias, Carry Trade Return and the Risks of Volatility and Liquidity","authors":"Ali Shehadeh, Youwei Li, Michael J. Moore","doi":"10.2139/SSRN.2789141","DOIUrl":"https://doi.org/10.2139/SSRN.2789141","url":null,"abstract":"In this paper, we analyse the relationship between the currency carry return and volatility and liquidity risk factors. We find that both categories of risk factors are relevant to understanding and explaining carry return, with an outperformance for volatility ones especially the global FX volatility risk factor. Consistent with the poor performance of currency carry trades during high FX volatility regime, we also show that the well-established negative slope coefficient in the Fama regression tends to be more positive and even above unity in times of high FX volatility. The paper, overall, contributes to the risk-based solution of the forward premium bias puzzle.","PeriodicalId":413816,"journal":{"name":"Econometric Modeling: International Financial Markets - Foreign Exchange eJournal","volume":"28 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2016-05-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"129211441","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper is a comprehensive investigation of calendar anomalies in the Ukrainian stock market. It employs various statistical techniques (average analysis, Student's t-test, ANOVA, the Kruskal-Wallis test, and regression analysis with dummy variables) and a trading simulation approach to test for the presence of the following anomalies: Day of the Week Effect; Turn of the Month Effect; Turn of the Year Effect; Month of the Year Effect; January Effect; Holiday Effect; Halloween Effect. The results suggest that in general calendar anomalies are not present in the Ukrainian stock market, but there are a few exceptions, i.e. the Turn of the Year and Halloween Effect for the PFTS index, and the Month of the Year Effect for UX futures. However, the trading simulation analysis shows that only trading strategies based on the Turn of the Year Effect for the PFTS index and the Month of the Year Effect for the UX futures can generate exploitable profit opportunities that can be interpreted as evidence against market efficiency.
{"title":"Calendar Anomalies in the Ukrainian Stock Market","authors":"G. Caporale, A. Plastun","doi":"10.2139/ssrn.2770571","DOIUrl":"https://doi.org/10.2139/ssrn.2770571","url":null,"abstract":"This paper is a comprehensive investigation of calendar anomalies in the Ukrainian stock market. It employs various statistical techniques (average analysis, Student's t-test, ANOVA, the Kruskal-Wallis test, and regression analysis with dummy variables) and a trading simulation approach to test for the presence of the following anomalies: Day of the Week Effect; Turn of the Month Effect; Turn of the Year Effect; Month of the Year Effect; January Effect; Holiday Effect; Halloween Effect. The results suggest that in general calendar anomalies are not present in the Ukrainian stock market, but there are a few exceptions, i.e. the Turn of the Year and Halloween Effect for the PFTS index, and the Month of the Year Effect for UX futures. However, the trading simulation analysis shows that only trading strategies based on the Turn of the Year Effect for the PFTS index and the Month of the Year Effect for the UX futures can generate exploitable profit opportunities that can be interpreted as evidence against market efficiency.","PeriodicalId":413816,"journal":{"name":"Econometric Modeling: International Financial Markets - Foreign Exchange eJournal","volume":"459 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2016-04-26","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"116159424","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2016-02-13DOI: 10.1093/ACPROF:OSO/9780198777625.003.0006
Weitseng Chen
This essay argues that the RMB internationalization scheme has wrongly pitched itself as an international project rather than a domestic one. The procyclical nature of the RMB internationalization scheme is at odds with macroprudential thinking, which aims to prevent systemic risks. Considering similar systemic risks inherent in China’s financial and banking systems as well as the shadow banking sector, the RMB scheme would not succeed without improving the capacity of various domestic financial institutions. Overemphasis on its global outcomes distorts the sequence of reforms necessary for a successful scheme and is likely to destabilize China’s domestic banking and financial sectors, where systemic risk exists. With a realigned focus, however, the RMB scheme could serve to inject fresh dynamics into ongoing reforms by introducing a host of macroprudential policies.
{"title":"China's Long March to Dismantling the Financial Great Wall: RMB Internationalization and Macroprudential Policy","authors":"Weitseng Chen","doi":"10.1093/ACPROF:OSO/9780198777625.003.0006","DOIUrl":"https://doi.org/10.1093/ACPROF:OSO/9780198777625.003.0006","url":null,"abstract":"This essay argues that the RMB internationalization scheme has wrongly pitched itself as an international project rather than a domestic one. The procyclical nature of the RMB internationalization scheme is at odds with macroprudential thinking, which aims to prevent systemic risks. Considering similar systemic risks inherent in China’s financial and banking systems as well as the shadow banking sector, the RMB scheme would not succeed without improving the capacity of various domestic financial institutions. Overemphasis on its global outcomes distorts the sequence of reforms necessary for a successful scheme and is likely to destabilize China’s domestic banking and financial sectors, where systemic risk exists. With a realigned focus, however, the RMB scheme could serve to inject fresh dynamics into ongoing reforms by introducing a host of macroprudential policies.","PeriodicalId":413816,"journal":{"name":"Econometric Modeling: International Financial Markets - Foreign Exchange eJournal","volume":"8 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2016-02-13","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"130009544","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
There has been much historic discussion about the effectiveness, or otherwise, of technical trading strategies in the financial markets. The view, that ‘technical analysis’ (TA) may be of limited value in a market seemingly driven by economic fundamentals, would seem to be supported by research showing that retail Foreign Exchange (FX) traders as a whole are not achieving returns above that of random trading. Despite this, technical trading strategies and the search for the ‘holy grail’ system remains ever popular with the Retail FX Trader. This paper examines three popular technical trading strategies and ‘best practices’ used by the retail FX trader, to try and identify rules and approaches that might help such a trader achieve ‘better-than-random’ trading results. Using a non-optimised, computer based trading simulation, results from over 175 million ‘random’ trades across nine years of data were evaluated to try and establish if such rules exist and to answer the question ‘can a Retail FX Trader ever expect to use technical analysis to achieve net profitable outcomes?’ The results show that the use of Technical Analysis does seem to offer better-than-random results and that setting significantly larger profit targets for trades, versus the maximum loss a trader is prepared to accept, can produce profitable trading, even when using no TA and entering trades randomly.
{"title":"The Retail FX Trader: Rising Above Random","authors":"C. Davison","doi":"10.2139/ssrn.2817271","DOIUrl":"https://doi.org/10.2139/ssrn.2817271","url":null,"abstract":"There has been much historic discussion about the effectiveness, or otherwise, of technical trading strategies in the financial markets. The view, that ‘technical analysis’ (TA) may be of limited value in a market seemingly driven by economic fundamentals, would seem to be supported by research showing that retail Foreign Exchange (FX) traders as a whole are not achieving returns above that of random trading. Despite this, technical trading strategies and the search for the ‘holy grail’ system remains ever popular with the Retail FX Trader. This paper examines three popular technical trading strategies and ‘best practices’ used by the retail FX trader, to try and identify rules and approaches that might help such a trader achieve ‘better-than-random’ trading results. Using a non-optimised, computer based trading simulation, results from over 175 million ‘random’ trades across nine years of data were evaluated to try and establish if such rules exist and to answer the question ‘can a Retail FX Trader ever expect to use technical analysis to achieve net profitable outcomes?’ The results show that the use of Technical Analysis does seem to offer better-than-random results and that setting significantly larger profit targets for trades, versus the maximum loss a trader is prepared to accept, can produce profitable trading, even when using no TA and entering trades randomly.","PeriodicalId":413816,"journal":{"name":"Econometric Modeling: International Financial Markets - Foreign Exchange eJournal","volume":"6 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2016-02-04","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"133963556","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Exchange rates and option prices incorporate market participants’ views about the credibility and the effects of exchange rate targets. I present a model to determine exchange rates under policy targets that can be used to price options. The model is estimated with Euro-Swiss Franc exchange rate and options price data. In the first few months of the minimum exchange rate policy, the implied survival probability of the policy for a three month horizon was typically less than 75%. Over time, the credibility increased and this probability reached 95% in August 2014. The analysis also implies that during the second quarter of 2012, when reserve accumulation was high, the exchange rate without the policy would have been as low as about 1 Swiss franc per euro.
{"title":"Financial Markets' Views about the Euro-Swiss Franc Floor","authors":"Urban Jermann","doi":"10.2139/ssrn.2490086","DOIUrl":"https://doi.org/10.2139/ssrn.2490086","url":null,"abstract":"Exchange rates and option prices incorporate market participants’ views about the credibility and the effects of exchange rate targets. I present a model to determine exchange rates under policy targets that can be used to price options. The model is estimated with Euro-Swiss Franc exchange rate and options price data. In the first few months of the minimum exchange rate policy, the implied survival probability of the policy for a three month horizon was typically less than 75%. Over time, the credibility increased and this probability reached 95% in August 2014. The analysis also implies that during the second quarter of 2012, when reserve accumulation was high, the exchange rate without the policy would have been as low as about 1 Swiss franc per euro.","PeriodicalId":413816,"journal":{"name":"Econometric Modeling: International Financial Markets - Foreign Exchange eJournal","volume":"27 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2016-02-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"117190903","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We study the growth effects of currency undervaluation when countries employ active exchange rate management policies or impose capital controls, using a panel dataset of 185 countries. Applying two-stage regressions, we find that changes in undervaluation driven by exchange rate management and capital control policies have no significant impact on economic growth. Undervaluation that leads to higher growth mainly stems from policies that lower government consumption, reduce inflation and increase domestic savings. However, these policies are good for growth by themselves, with only limited additional growth effects through increased currency undervaluation. In sum, we find no evidence that battling in the currency depreciation war significantly increases a country's growth rate.
{"title":"Currency Wars: Who Gains from the Battle?","authors":"P. Cumperayot, Roy Kouwenberg","doi":"10.2139/ssrn.2714277","DOIUrl":"https://doi.org/10.2139/ssrn.2714277","url":null,"abstract":"We study the growth effects of currency undervaluation when countries employ active exchange rate management policies or impose capital controls, using a panel dataset of 185 countries. Applying two-stage regressions, we find that changes in undervaluation driven by exchange rate management and capital control policies have no significant impact on economic growth. Undervaluation that leads to higher growth mainly stems from policies that lower government consumption, reduce inflation and increase domestic savings. However, these policies are good for growth by themselves, with only limited additional growth effects through increased currency undervaluation. In sum, we find no evidence that battling in the currency depreciation war significantly increases a country's growth rate.","PeriodicalId":413816,"journal":{"name":"Econometric Modeling: International Financial Markets - Foreign Exchange eJournal","volume":"22 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2016-01-12","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"126762445","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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