Showing papers on "Foreign exchange market published in 2016"

Evaluating machine learning classification for financial trading

Abstract: Low-complexity machine learning models are used trade in the FOREX market.A six year trading simulation in USDJPY, EURGPB and EURUSD are assessed.Periodic retraining, number of attributes and retraining set size are varied and studied.Middle range accuracies are obtained with high financial returns in the long term. Technical and quantitative analysis in financial trading use mathematical and statistical tools to help investors decide on the optimum moment to initiate and close orders. While these traditional approaches have served their purpose to some extent, new techniques arising from the field of computational intelligence such as machine learning and data mining have emerged to analyse financial information. While the main financial engineering research has focused on complex computational models such as Neural Networks and Support Vector Machines, there are also simpler models that have demonstrated their usefulness in applications other than financial trading, and are worth considering to determine their advantages and inherent limitations when used as trading analysis tools. This paper analyses the role of simple machine learning models to achieve profitable trading through a series of trading simulations in the FOREX market. It assesses the performance of the models and how particular setups of the models produce systematic and consistent predictions for profitable trading. Due to the inherent complexities of financial time series the role of attribute selection, periodic retraining and training set size are discussed in order to obtain a combination of those parameters not only capable of generating positive cumulative returns for each one of the machine learning models but also to demonstrate how simple algorithms traditionally precluded from financial forecasting for trading applications presents similar performances as their more complex counterparts. The paper discusses how a combination of attributes in addition to technical indicators that has been used as inputs of the machine learning-based predictors such as price related features, seasonality features and lagged values used in classical time series analysis are used to enhance the classification capabilities that impacts directly into the final profitability.

Information flows in foreign exchange markets: dissecting customer currency trades

Abstract: We study the information in order flows in the world's largest over-the-counter market, the foreign exchange (FX) market. The analysis draws on a data set covering a broad cross-section of currencies and different customer segments of FX end-users. The results suggest that order flows are highly informative about future exchange rates and provide significant economic value. We also find that different customer groups can share risk with each other effectively through the intermediation of a large dealer, and differ markedly in their predictive ability, trading styles, and risk exposure.

Does the financial channel of exchange rates offset the trade channel

Abstract: While the trade channel indicates that an exchange rate depreciation will stimulate domestic economic activity, the financial channel can have the opposite effect. When banks and non-banks have foreign currency liabilities, an exchange rate depreciation has valuation effects that can lead to a tightening in domestic financial conditions. Using trade-weighted exchange rates and new BIS-constructed debt-weighted exchange rates to separate these influences, this article finds that the financial channel partly offsets the trade channel for emerging market economies but the effect is weaker for advanced economies.

Dynamics of volatility spillover between stock market and foreign exchange market: evidence from Asian Countries

Abstract: The purpose of this study is to examine volatility spillover effects between stock market and foreign exchange market in selected Asian countries; Pakistan, India, Sri Lanka, China, Hong Kong and Japan. This study considered daily data from 4th January, 1999 to 1st January, 2014. This study opted EGARCH (Exponential Generalized Auto Regressive Conditional Heteroskedasticity) model for the purpose of analyzing asymmetric volatility spillover effects between stock and foreign exchange market. The EGARCH analyses reveal bidirectional asymmetric volatility spillover between stock market and foreign exchange market of Pakistan, China, Hong Kong and Sri Lanka. The results reveal unidirectional transmission of volatility from stock market to foreign exchange market of India. The analysis reveals no evidence of volatility transmission between the two markets in reference to Japan. The result of this study provide valuable insights to economic policy makers for financial stability perspective and to investors regarding decision making in international portfolio and currency risk strategies.

The Reaction of Asset Markets to Swiss National Bank Communication

Abstract: In this paper we analyze high-frequency movements in Swiss asset markets in reaction to real-time communication by the Swiss National Bank. Our analysis of central bank communication encompasses monetary policy announcements, speeches and interviews. We examine the reactions of the currency market, the bond market and the stock exchange. The evidence suggests that speeches and interviews, along with monetary policy announcements, engender a significant price reaction. This paper sheds light on the relevance of communications other than monetary policy announcements.

Tail dependence structure of the foreign exchange market: A network view

Abstract: Tail dependence of financial entities describes when the price of one financial asset has an extreme fluctuation (e.g., price sharply rises or falls), the degree of its effect on the price fluctuation of another asset. Under the background of the global financial crisis, tail dependence structure of financial entities plays an important role in financial risk management, portfolio selection, and asset pricing. In this paper, we propose a concept of tail dependence networks to investigate the tail dependence structure of the foreign exchange (FX) market. Lower- and upper-tail dependence networks for 42 major currencies in the FX market from 2005 to 2012 are constructed by combing the symmetrized Joe-Clayton copula model and two filtered graph algorithms, i.e., the minimum spanning tree (MST) and the planar maximally filtered graph (PMFG). We also construct the tail dependence hierarchical trees (HTs) associated with the MSTs to analyze the currency clusters. We find that (1) the two series of lower- and upper-tail dependence coefficients present different statistical properties; (2) the upper-tail dependence networks are tighter than the lower-tail dependence networks; and (3) different currency clusters, cliques and communities are respectively found in the two tail dependence networks. The key empirical results indicate that market participants should consider the different topological features at different market situations (e.g., a booming market or a recession market) to make decisions on the investing or hedging strategies. Overall, our obtained results based on the tail dependence networks are new insights in financial management and supply a novel analytical tool for market participants.

Technical Trading: Is it Still Beating the Foreign Exchange Market?

Abstract: We carry out a large-scale investigation of technical trading rules in the foreign exchange market, using daily data over 45 years for 30 developed and emerging market currencies. Employing a stepwise test to counter data-snooping bias and examining over 21,000 technical rules, we find evidence of substantial predictability and excess profitability in both developed and emerging currencies, measured against a variety of performance metrics. We cross-validate our results using out-of-sample analysis. We find time-series and cross-sectional variation in sub-periods and cultural and/or geographic groups, respectively, suggesting that temporarily not-fully-rational behavior and market immaturity generate technical predictability and potential excess profitability.

Exchange rate exposure and risk management: The case of Japanese exporting firms

Abstract: This paper investigates the relationship between Japanese firms’ exposure to the exchange rate risk and their risk management. Following Dominguez (1998) and others, we first estimate the firms’ exposure to the exchange rate risk by regressing their stock prices on the exchange rate and the market portfolio. We next investigate possible influences of various risk management measures on the firms’ foreign exchange exposure. Risk management variables include financial and operational hedging, the invoice currency choice, and the price revision strategy (pass-through) of 227 listed firms in 2009, which were collected from a questionnaire survey of Japanese firms listed in the Tokyo Stock Exchange. Our main findings are as follows: First, firms with greater dependency on sales in foreign markets have greater foreign exchange exposure, judged by the market. Second, the higher the US dollar invoicing share, the greater the foreign exchange exposure is, which can be reduced by both financial and operational hedging. Third, yen invoicing reduces foreign exchange exposure. These findings indicate that Japanese firms use a combination of risk management tools to mitigate the degree of exchange rate risk.

A Forex trading expert system based on a new approach to the rule-base evidential reasoning

Abstract: Currently FOREX (foreign exchange market) is the largest financial market over the world. Usually the Forex market analysis is based on the Forex time series prediction. Nevertheless, trading expert systems based on such predictions do not usually provide satisfactory results. On the other hand, stock trading expert systems called also “mechanical trading systems”, which are based on the technical analysis, are very popular and may provide good profits. Therefore, in this paper we propose a Forex trading expert system based on some new technical analysis indicators and a new approach to the rule-base evidential reasoning (RBER) (the synthesis of fuzzy logic and the Dempster–Shafer theory of evidence). We have found that the traditional fuzzy logic rules lose an important information, when dealing with the intersecting fuzzy classes, e.g., such as Low and Medium and we have shown that this property may lead to the controversial results in practice. In the framework of the proposed in the current paper new approach, an information of the values of all membership functions representing the intersecting (competing) fuzzy classes is preserved and used in the fuzzy logic rules. The advantages of the proposed approach are demonstrated using the developed expert system optimized and tested on the real data from the Forex market for the four currency pairs and the time frames 15 m, 30 m, 1 h and 4 h.

Currency Wars, Coordination, and Capital Controls

Abstract: The strong monetary policy actions undertaken by advanced economies’ central banks have led to complaints of “currency wars” by some emerging market economies, and to widespread demands for more macroeconomic policy coordination. This paper revisits these issues. It concludes that, while advanced economies’ monetary policies indeed have had substantial spillover effects on emerging market economies, there was and still is little room for coordination. It then argues that restrictions on capital flows were and are a more natural instrument for advancing the objectives of both macro and financial stability.

Information Flows in Foreign Exchange Markets: Dissecting Customer Currency Trades

Abstract: We study the information in order flows in the world's largest over-the-counter market, the foreign exchange market. The analysis draws on a data set covering a broad cross-section of currencies and different customer segments of foreign exchange end-users. The results suggest that order flows are highly informative about future exchange rates and provide significant economic value. We also find that different customer groups can share risk with each other effectively through the intermediation of a large dealer, and differ markedly in their predictive ability, trading styles, and risk exposure.

Cables, Sharks and Servers: Technology and the Geography of the Foreign Exchange Market

Abstract: We analyze the impact of technology on production and trade in services, focusing on the foreign exchange market. We identify exogenous technological changes by the connection of countries to submarine fiber-optic cables used for electronic trading, but which were not laid for purposes related to the foreign exchange market. We estimate the impact of cable connections on the share of offshore foreign exchange transactions. Cable connections between local markets and matching servers in the major financial centers lower the fixed costs of trading currencies and increase the share of currency trades occurring onshore. At the same time, however, they attenuate the effect of standard spatial frictions such as distance, local market liquidity, and restrictive regulations that otherwise prevent transactions from moving to the major financial centers. Our estimates suggest that the second effect dominates. Technology dampens the impact of spatial frictions by up to 80 percent and increases, in net terms, the share of offshore trading by 21 percentage points. Technology also has economically important implications for the distribution of foreign exchange transactions across financial centers, boosting the share in global turnover of London, the world’s largest trading venue, by as much as one-third.

Gold, currencies and market efficiency

Abstract: Gold and currency markets form a unique pair with specific interactions and dynamics. We focus on the efficiency ranking of gold markets with respect to the currency of purchase. By utilizing the Efficiency Index (EI) based on fractal dimension, approximate entropy and long-term memory on a wide portfolio of 142 gold price series for different currencies, we construct the efficiency ranking based on the extended EI methodology we provide. Rather unexpected results are uncovered as the gold prices in major currencies lay among the least efficient ones whereas very minor currencies are among the most efficient ones. We argue that such counterintuitive results can be partly attributed to a unique period of examination (2011–2014) characteristic by quantitative easing and rather unorthodox monetary policies together with the investigated illegal collusion of major foreign exchange market participants, as well as some other factors discussed in some detail.

The political–economic geography of foreign exchange trading

Abstract: We propose a conceptual framework for the political–economic geography of foreign exchange trading, focusing on the causes and consequences of the relationship between the international currency system and international financial centres. The framework is used to analyse data for 1995–2013 demonstrating that while the trading activity has boomed, its structure by currency, with USD in the lead, has remained remarkably stable, and its concentration in the NYLON axis has grown. We show that Asian currencies and financial centres have made little progress in the foreign exchange market, and argue that any challenge of RMB to USD would require nothing short of an unprecedented geo-political and geo-economic transformation.

Foreign exchange market intervention in EMEs: what has changed?

Abstract: Since the Great Financial Crisis, emerging market economies have been more active in FX markets. As rising dollar debt and increased exposure to global financing flows have affected the demand and supply of foreign currency, financial stability has become an increasingly important motive for interventions. Adjustments in intervention tactics and instruments are consistent with a greater importance of financial stability considerations. Timely interventions can be effective in improving FX market liquidity, and there are credibility gains from holding foreign reserve buffers in countries with low credit ratings. Since the carrying costs of holding reserves have increased, countries with higher credit ratings may have incentives to reduce the size of reserve buffers.

Global Political Risk and Currency Momentum

Abstract: Using a measure of global political risk, relative to the U.S., that captures unexpected political conditions, we show that political risk is priced in the cross section of currency momentum and contains information beyond other risk factors. Our results are robust after controlling for transaction costs, reversals and alternative limits to arbitrage. The global political environment affects the profitability of the momentum strategy in the foreign exchange market; investors following such strategies are compensated for the exposure to the global political risk of those currencies they hold, i.e., the past winners, and exploit the lower returns of loser portfolios.

Comovement of Exchange Rates: A Wavelet Analysis

Abstract: In this article we investigate the behavior of exchange rates in Central and Eastern European countries. The results strongly indicate that interactions between exchange rates have different characteristics at different timescales. Our results show that CEE exchange rates are nearly perfectly integrated in the short and medium run, since the returns obtained in any of the CEE foreign exchange market can almost be explained by the overall performance in the other CEE markets. The discrepancies between CEE exchange rates are small, but increase within three to six months and that means in the long run the integration of foreign exchange markets is weak.

Stock Returns and Exchange Rate Nexus in Ghana: A Bayesian Quantile Regression Approach

Abstract: This paper presents analysis of the relationship and dependence structure between stock returns and exchange rates in Ghana using data of daily periodicity from January 4, 2011 to July 31, 2014 Analyses are conducted by means of Bayesian quantile regression (QR) technique and multiple causality tests Our findings suggest high dependence of the equity market on the foreign exchange market in Ghana, and that the link between the two markets follows the international trade-oriented model more than the portfolio balance theory We report that among the six exchange rates used, only the cedi–dollar registers instantaneous effect on the equity market

Asymmetric Volatility Connectedness on Forex Markets

Abstract: We show how bad and good volatility propagate through forex markets, i.e., we provide evidence for asymmetric volatility connectedness on forex markets. Using high-frequency, intra-day data of the most actively traded currencies over 2007 -- 2015 we document the dominating asymmetries in spillovers that are due to bad rather than good volatility. We also show that negative spillovers are chiefly tied to the dragging sovereign debt crisis in Europe while positive spillovers are correlated with the subprime crisis, different monetary policies among key world central banks, and developments on commodities markets. It seems that a combination of monetary and real-economy events is behind the net positive asymmetries in volatility spillovers, while fiscal factors are linked with net negative spillovers.

Capital Flows and Foreign Exchange Intervention

Abstract: I consider a New Keynesian model of a small open economy where international financial markets are imperfect and the exchange rate is determined by capital flows. I use this framework to study the effects of exchange rate fluctuations driven by capital flows and characterize the optimal foreign exchange intervention. Capital flow shocks cause inefficient exchange rate fluctuations that trigger boom-bust cycles in the domestic economy. The optimal policy response is to use both foreign exchange intervention and monetary policy to stabilize the economy. Foreign exchange intervention “leans against the wind” and stabilizes the path of the exchange rate, while monetary policy corrects the inefficiencies caused by price rigidity. The two tools are complements rather than substitutes. I derive the optimal foreign exchange intervention rule in closed form as a function of three implicit targets: a wedge in the Bakus-Smith condition, domestic net foreign assets, and the level of foreign reserves.

Community Analysis of Global Financial Markets

Abstract: We analyze the daily returns of stock market indices and currencies of 56 countries over the period of 2002–2012 We build a network model consisting of two layers, one being the stock market indices and the other the foreign exchange markets Synchronous and lagged correlations are used as measures of connectivity and causality among different parts of the global economic system for two different time intervals: non-crisis (2002–2006) and crisis (2007–2012) periods We study community formations within the network to understand the influences and vulnerabilities of specific countries or groups of countries We observe different behavior of the cross correlations and communities for crisis vs non-crisis periods For example, the overall correlation of stock markets increases during crisis while the overall correlation in the foreign exchange market and the correlation between stock and foreign exchange markets decrease, which leads to different community structures We observe that the euro, while being central during the relatively calm period, loses its dominant role during crisis Furthermore we discover that the troubled Eurozone countries, Portugal, Italy, Greece and Spain, form their own cluster during the crisis period

Interdependencies and Causalities in Coupled Financial Networks

Abstract: We explore the foreign exchange and stock market networks for 48 countries from 1999 to 2012 and propose a model, based on complex Hilbert principal component analysis, for extracting significant lead-lag relationships between these markets. The global set of countries, including large and small countries in Europe, the Americas, Asia, and the Middle East, is contrasted with the limited scopes of targets, e.g., G5, G7 or the emerging Asian countries, adopted by previous works. We construct a coupled synchronization network, perform community analysis, and identify formation of four distinct network communities that are relatively stable over time. In addition to investigating the entire period, we divide the time period into into "mild crisis," (1999-2002), "calm," (2003-2006) and "severe crisis" (2007-2012) sub-periods and find that the severe crisis period behavior dominates the dynamics in the foreign exchange-equity synchronization network. We observe that in general the foreign exchange market has predictive power for the global stock market performances. In addition, the United States, German and Mexican markets have forecasting power for the performances of other global equity markets.