Central bank intervention with limited arbitrage

Shleifer and Vishny (1997) pointed out some of the practical and theoretical problems associated with assuming that rational risk-arbitrage would quickly drive asset prices back to long-run equilibrium. In particular, they showed that the possibility that asset price disequilibrium would worsen, before being corrected, tends to limit rational speculators. Uniquely, Shleifer and Vishny (1997) showed that “performance-based asset management” would tend to reduce risk-arbitrage when it is needed most, when asset prices are furthest from equilibrium. We analyze a generalized Shleifer and Vishny (1997) model for central bank intervention. We show that increasing availability of arbitrage capital has a pronounced effect on the dynamic intervention strategy of the central bank. Intervention is reduced during periods of moderate misalignment and amplified at times of extreme misalignment. This pattern is consistent with empirical observation.

Predicting exchange rate volatility: genetic programming vs. GARCH and RiskMetrics

This article investigates the use of genetic programming to forecast out-of-sample daily volatility in the foreign exchange market. Forecasting performance is evaluated relative to GARCH(1,1) and RiskMetrics models for two currencies, DEM and JPY. Although the GARCH/RiskMetrics models appear to have a inconsistent marginal edge over the genetic program using the mean-squared-error (MSE) and R2 criteria, the genetic program consistently produces lower mean absolute forecast errors (MAE) at all horizons and for both currencies.Foreign exchange rates ; Forecasting ; Programming (Mathematics)

Intraday technical trading in the foreign exchange market

This paper examines the out-of-sample performance of intraday technical trading strategies selected using two methodologies, a genetic program and an optimized linear forecasting model. When realistic transaction costs and trading hours are taken into account, we find no evidence of excess returns to the trading rules derived with either methodology. Thus, our results are consistent with market efficiency. We do, however, find that the trading rules discover some remarkably stable patterns in the data.Foreign exchange

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

Lessons from the evolution of foreign exchange trading strategies

The adaptive markets hypothesis posits that trading strategies evolve as traders adapt their behavior to changing circumstances. This paper studies the evolution of trading strategies for a hypothetical trader who chooses portfolios from foreign exchange (forex) technical rules in major and emerging markets, the carry trade, and U.S. equities. The results show that forex trading alone dramatically outperforms the S&P 500 but there is little gain to coordinating forex and equity strategies, which explains why practitioners consider these tools separately. In addition, a backtesting procedure to choose optimal portfolios does not select carry trade strategies until well into the 1990s, which helps to explain the relatively recent surge in interest in this strategy. Forex trading returns dip significantly in the 1990s but recover by the end of the decade and have greatly outperformed an equity position since 1998. Overall, trading rule returns still exist in forex markets—with substantial stability in the types of rules—though they have migrated to emerging markets to a considerable degree.Foreign exchange ; Trade

Is technical analysis in the foreign exchange market profitable? a genetic programming approach

Using genetic programming techniques to find technical trading rules, we find strong evidence of economically significant out-of-sample excess returns to those rules for each of six exchange rates, over the period 1981-1995. Further, when the dollar/deutschemark rules are allowed to determine trades in the other markets, there is a significant improvement in performance in all cases, except for the deutschemark/yen. Betas calculated for the returns according to various benchmark portfolios provide no evidence that the returns to these rules are compensation for bearing systematic risk. Bootstrapping results on the dollar/deutschemark indicate that the trading rules are detecting patterns in the data that are not captured by standard statistical models.Programming (Mathematics) ; Foreign exchange

The adaptive markets hypothesis: evidence from the foreign exchange market

We analyze the intertemporal stability of excess returns to technical trading rules in the foreign exchange market by conducting true, out-of-sample tests on previously studied rules. The excess returns of the 1970s and 1980s were genuine and not just the result of data mining. But these profit opportunities had disappeared by the early 1990s for filter and moving average rules. Returns to less-studied rules also have declined but have probably not completely disappeared. High volatility prevents precise estimation of mean returns. These regularities are consistent with the Adaptive Markets Hypothesis (Lo, 2004), but not with the Efficient Markets Hypothesis.Foreign exchange market ; Foreign exchange

Upstream Influence of a Porous Screen on the Flow Field of a Free Jet

This paper investigates the upstream influence of a range of transverse porous screen geometries on the flow fields of free jets. Infrared thermography was used to map the vertical distribution of temperature in a horizontal heated jet and measure the upstream influence of the screen. Two-dimensional CFD simulations of the flow fields of jets passing through a transverse porous screen, modelled as an array of cylindrical filaments, were also performed for a range of flow speeds (ReD = 6847 to 54779) and screen porosities (! = 0.5 to 1). Reasonable agreement in flow behaviour was obtained using the two methodologies, both of which identified a spreading of the jet flow at the plane of the screen which was primarily dependent on the screen porosity and to a lesser degree the flow Reynolds number. The numerical simulations for these flow conditions predicted that, for a screen placed at x/D = 2, the increase in the full-width half-maximum of the jet velocity profile in the plane of the screen was less than 5% for porosities above 0.85 but increased an order of magnitude when the screen porosity was reduced to 0.5

Effect of Ceramic Reinforcements on the Mechanical Behaviour of 7xxx series Aluminium Matrix Composites

The effect of ceramic reinforcements on the mechanical properties of 7xxx series aluminium matrix composites (AMCs) was critically reviewed. Reinforcement of an Al 7xxx alloy with ceramic particulates is expected to improve its tensile strength but in practice the incorporation has produced diverse results. Some researchers have reported significant increases in the tensile strengths of particulate reinforced 7xxx Al matrices while others have reported decreases in this property. The published data including our present experimental work performed on particulate reinforced Al 7xxx alloys was analysed to study the role of ceramic particulates on the tensile and fracture behaviour of this class of composites. It was concluded that high strength of the matrix can negate the benefits of particulate reinforcements though this role is still ambiguous and further work is required to optimise the potential enhancement of Al 7xxx matrix composites reinforced with nano-scale ceramic particles

Predictability in international asset returns : a re-examination

This paper argues that inferring long-horizon asset-return predictability from the properties of vector autoregressive (VAR) models on relatively short spans of data is potentially unreliable. We illustrate the problems that can arise by re-examining the findings of Bekaert and Hodrick (1992), who detected evidence of in-sample predictability in international equity and foreign exchange markets using VAR methodology for a variety of countries over the period 1981-1989. The VAR predictions are significantly biased in most out-of-sample forecasts and are conclusively outperformed by a simple benchmark model at horizons of up to six months. This remains true even after corrections for small sample bias and the introduction of Bayesian parameter restrictions. A Monte Carlo analysis indicates that the data are unlikely to have been generated by a stable VAR. This conclusion is supported by an examination of structural break statistics. Implied long-horizon statistics calculated from the VAR parameter estimates are shown to be very unreliable