Technical analysis in the foreign exchange market

This article introduces the subject of technical analysis in the foreign exchange market, with emphasis on its importance for questions of market efficiency. Technicians view their craft, the study of price patterns, as exploiting traders’ psychological regularities. The literature on technical analysis has established that simple technical trading rules on dollar exchange rates provided 15 years of positive, risk-adjusted returns during the 1970s and 80s before those returns were extinguished. More recently, more complex and less studied rules have produced more modest returns for a similar length of time. Conventional explanations that rely on risk adjustment and/or central bank intervention are not plausible justifications for the observed excess returns from following simple technical trading rules. Psychological biases, however, could contribute to the profitability of these rules. We view the observed pattern of excess returns to technical trading rules as being consistent with an adaptive markets view of the world.Foreign exchange rates

Understanding Trading Behavior in 401(k) Plans

We use a new database covering 1.2 million active participants to study trading activities in 1,530 defined contribution retirement plans. Descriptive statistics and regression analysis indicate some interesting trading patterns. First, we show that trading activity in 401(k) accounts is very limited: only 20% of participants ever reshuffled their portfolios in two years. Second, demographic characteristics are strongly associated with trading activities: traders are older, wealthier, more highly paid, male employees with longer plan tenure. Finally, we find that plan design factors, such as the number of funds offered, loan availability, and specific fund-families offered have significant impacts on 401(k) plan participants’ trading behavior. Moreover, on-line access channels stimulate participants to trade more frequently, although they do not increase turnover ratio as much. We conclude that plan design features are crucial in sharing trading patterns in 401(k) plans.

Foreign exchange: macro puzzles, micro tools

This paper reviews recent progress in applying information-theoretic tools to long-standing exchange rate puzzles. I begin by distinguishing the traditional public information approach (e.g., monetary models, including new open-economy models) from the newer dispersed information approach. (The latter focuses on how information is aggregated in the trading process.) I then review empirical results from the dispersed information approach and relate them to two key puzzles, the determination puzzle and the excess volatility puzzle. The dispersed information approach has made progress on both.Foreign exchange rates

Application of Adaptive Νeuro-Fuzzy Inference System in Interest Rates Effects on Stock Returns

In the current study we examine the effects of interest rate changes on common stock returns of Greek banking sector. We examine the Generalized Autoregressive Heteroskedasticity (GARCH) process and an Adaptive Neuro-Fuzzy Inference System (ANFIS). The conclusions of our findings are that the changes of interest rates, based on GARCH model, are insignificant on common stock returns during the period we examine. On the other hand, with ANFIS we can get the rules and in each case we can have positive or negative effects depending on the conditions and the firing rules of inputs, which information is not possible to be retrieved with the traditional econometric modelling. Furthermore we examine the forecasting performance of both models and we conclude that ANFIS outperforms GARCH model in both in-sample and out-of-sample periods

Exchange Traded Funds: History, Trading and Research

We survey the litterature devoted to Exchange Traded Fundsliterature review, Exchange Traded Funds

A multivariate analysis of rational and behavioral factors that may explain the existence of discounts (premiums) of closed-end investment funds

Using multivariate analysis and based on a theoretical framework that we call hybrid theory (which considers rational and behavioral explanations for the close-end investment funds discounts/premiums), we intend to test the validity of certain factors such as agency costs, dividend policy and liquidity (so-called rational factors), combined with investor sentiment and limits to arbitrage (behavioral factors) to explain the structure of closed-end funds discounts (premiums) in the US market. Note that, as far as we know, few empirical papers have tested the validity of this approach. Based on a sample of 346 US closed-end funds, we present evidence that dividend policy (dividend yield), the portfolio composition (restricted assets) and turnover ratio, as well as the investor sentiment and replication costs (as arbitrage limits) are statistically significant variables by the multivariate regression analysis undertaken, which seems to support empirically the hybrid hypothesis. This paper also intends, by stepwise discriminant analysis, to identify which of these explanatory factors of closed-end funds discounts (premiums) contribute most to discriminate between bond and equity funds. Results indicate that the dividend yield, management fee and replication costs (limits to arbitrage) are the main contributors to the discriminant function, with about 92% of the funds properly classified

Price pressures

We study price pressures in stock prices—price deviations from fundamental value due to a risk-averse intermediary supplying liquidity to asynchronously arriving investors. Empirically, twelve years of daily New York Stock Exchange intermediary data reveal economically large price pressures. A $100,000 inventory shock causes an average price pressure of 0.28% with a half-life of 0.92 days. Price pressure causes average transitory volatility in daily stock returns of 0.49%. Price pressure effects are substantially larger with longer durations in smaller stocks. Theoretically, in a simple dynamic inventory model the ‘representative’ intermediary uses price pressure to control risk through inventory mean reversion. She trades off the revenue loss due to price pressure against the price risk associated with remaining in a nonzero inventory state. The model’s closed-form solution identifies the intermediary’s relative risk aversion and the distribution of investors’ private values for trading from the observed time series patterns. These allow us to estimate the social costs—deviations from constrained Pareto efficiency—due to price pressure which average 0.35 basis points of the value traded. JEL Classification: G12, G14, D53, D6

A Behavioural Approach To Financial Puzzles

Many financial puzzles have been solved, at least partially, by the introduction of alternative assumptions on the behaviour of investors. Cumulative prospect theory and mental accounting are two such approaches which are used in this paper to analyze some of the most important financial puzzles. We first focus our attention on anomalies (or considered as such in the standard expected utility model) at the individual level, for example the disposition effect or the low diversification puzzle. We then address two aggregate puzzles, namely the equity premium puzzle and the return predictability puzzle. We show how recent behavioral models allow to explain these anomalies in a very natural way.

The Economic and Financial Determinants of Carbon Prices

The aim of this paper is to analyze the economic and financial determinants of carbon dioxide (CO2) prices from the short and long-term perspective, in particular within the EU-wide CO2 emissions trading system (EU ETS). After reviewing present carbon markets, this paper investigates the several drivers of carbon prices from both n financial and an economic perspective. It then examines the main impacts of these drivers in the short and long term. Finally, by comparing the results of several academic and financial studies, this paper identifies the average carbon price and its standard deviation for different future time horizons.CO2 emission allowances, Emissions Trading Scheme, EU ETS, CO2 price, carbon market