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Lucio Sarno - One of the best experts on this subject based on the ideXlab platform.

  • global liquidity risk in the Foreign Exchange Market
    Journal of International Money and Finance, 2012
    Co-Authors: Chiara Banti, Lucio Sarno, Kate Phylaktis
    Abstract:

    Using a broad data set of 20 US dollar Exchange rates and order flow of institutional investors over 14 years, we construct a measure of global liquidity risk in the Foreign Exchange (FX) Market. Our FX liquidity measure may be seen as the analog of the well-known Pastor–Stambaugh liquidity measure for the US stock Market. We show that this measure has reasonable properties, and that there is a strong common component in liquidity across currencies. Finally, we provide evidence that liquidity risk is priced in the cross-section of currency returns, and estimate the liquidity risk premium in the FX Market around 4.7 percent per annum.

  • global liquidity risk in the Foreign Exchange Market
    Social Science Research Network, 2011
    Co-Authors: Chiara Banti, Lucio Sarno, Kate Phylaktis
    Abstract:

    Using a broad data set of 20 US dollar Exchange rates and order flow of institutional investors over 14 years, we construct a measure of global liquidity risk in the Foreign Exchange (FX) Market. Our FX liquidity measure may be seen as the analogue of the well-known Pastor-Stambaugh liquidity measure for the US stock Market. We show that this measure has reasonable properties, and that there is a strong common component in liquidity across currencies. Finally, we provide evidence that liquidity risk is priced in the cross-section of currency returns, and estimate the liquidity risk premium in the FX Market around 4.7 percent per annum.

  • arbitrage in the Foreign Exchange Market turning on the microscope
    Journal of International Economics, 2008
    Co-Authors: Farooq Q Akram, Dagfinn Rime, Lucio Sarno
    Abstract:

    This paper provides real-time evidence on the frequency, size, duration and economic significance of arbitrage opportunities in the Foreign Exchange Market. We investigate deviations from the covered interest rate parity (CIP) condition using a unique data set for three major capital and Foreign Exchange Markets that covers a period of more than seven months at tick frequency. The analysis unveils that: i) short-lived violations of CIP arise; ii) the size of CIP violations can be economically significant; iii) their duration is, on average, high enough to allow agents to exploit them, but low enough to explain why such opportunities have gone undetected in much previous research using data at lower frequency.

  • arbitrage in the Foreign Exchange Market turning on the microscope
    SIFR Research Report Series, 2006
    Co-Authors: Farooq Q Akram, Dagfinn Rime, Lucio Sarno
    Abstract:

    This paper investigates the presence and characteristics of arbitrage opportunities in the Foreign Exchange Market using a unique data set for three major capital and Foreign Exchange Markets that covers a period of more than seven months at tick frequency, obtained from Reuters on special order. We provide evidence on the frequency, size and duration of round-trip and one-way arbitrage opportunities in real time. The analys is unveils the existence of numerous short-lived arbitrage opportunities, whose size is economically significant across Exchange rates and comparable across different maturities of the instruments involved in arbitrage. The duration of arbitrage opportunities is, on average, high enough to allow agents to exploit deviations from the law of one price, but low enough to explain why such opportunities have gone undetected in much previous research using data at lower frequency.

  • official intervention in the Foreign Exchange Market is it effective and if so how does it work
    2001
    Co-Authors: Mark P Taylor, Lucio Sarno
    Abstract:

    In this Paper we assess the progress made by the profession in understanding whether and how Exchange rate intervention works. To this end, we review the theory and evidence on official intervention, concentrating primarily on work published within the last decade or so. Our reading of the recent literature leads us to conclude that, in contrast with the profession's consensus view of the 1980s, official intervention can be effective, especially through its role as a signal of policy intentions, and especially when it is publicly announced and concerted. We also note, however, an apparent empirical puzzle concerning the secrecy of much intervention and suggest an additional way in which intervention may be effective but which has so far received little attention in the literature, namely through its role in remedying a coordination failure in the Foreign Exchange Market.

Mark P Taylor - One of the best experts on this subject based on the ideXlab platform.

  • technical trading is it still beating the Foreign Exchange Market
    Journal of International Economics, 2016
    Co-Authors: Pohsuan Hsu, Mark P Taylor, Zigan Wang
    Abstract:

    We carry out a large-scale investigation of technical trading rules in the Foreign Exchange Market, using daily data over 45years 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 subperiods and cultural and/or geographic groups, respectively, suggesting that temporarily not-fully-rational behavior and Market immaturity generate technical predictability and potential excess profitability.

  • the crisis in the Foreign Exchange Market
    2009
    Co-Authors: Michael Melvin, Mark P Taylor
    Abstract:

    The financial crisis of 2007-2008 had major implications for the Foreign Exchange Market. We review events and implications for Exchange rates, volatility, returns to currency investing, and transaction costs. This “blow-by-blow” narrative is intended to be a resource for researchers seeking a comprehensive review of the “what, why and when” of the financial crisis in terms of Foreign Exchange Market dynamics. An implementable financial stress index (FSI) is created and then used to illustrate the dramatic nature of the current crisis compared to earlier crises. We also examine how the global FSI might have been used to condition the exposure to the carry trade (long high interest rate currencies, short low interest rate currencies) and we show that such an index has potential value in protecting a portfolio against loss during periods of stress, although this result is subject to the important caveats of controlling for transaction costs and timely recognition of the change in regime.

  • the crisis in the Foreign Exchange Market
    Journal of International Money and Finance, 2009
    Co-Authors: Michael Melvin, Mark P Taylor
    Abstract:

    We provide an overview of the important events of the recent global financial crisis and their implications for Exchange rates and Market dynamics. Our goal is to catalogue all that was truly of major importance in this episode. We also construct a quantitative measure of crises that allows for a comparison of the current crisis to earlier events. In addition, we address whether one could have predicted costly events before they happened in a manner that would have allowed Market participants to moderate their risk exposures and yield better returns from currency speculation.

  • official intervention in the Foreign Exchange Market is it effective and if so how does it work
    2001
    Co-Authors: Mark P Taylor, Lucio Sarno
    Abstract:

    In this Paper we assess the progress made by the profession in understanding whether and how Exchange rate intervention works. To this end, we review the theory and evidence on official intervention, concentrating primarily on work published within the last decade or so. Our reading of the recent literature leads us to conclude that, in contrast with the profession's consensus view of the 1980s, official intervention can be effective, especially through its role as a signal of policy intentions, and especially when it is publicly announced and concerted. We also note, however, an apparent empirical puzzle concerning the secrecy of much intervention and suggest an additional way in which intervention may be effective but which has so far received little attention in the literature, namely through its role in remedying a coordination failure in the Foreign Exchange Market.

Paolo Vitale - One of the best experts on this subject based on the ideXlab platform.

  • speculative noise trading and manipulation in the Foreign Exchange Market
    Journal of International Money and Finance, 2000
    Co-Authors: Paolo Vitale
    Abstract:

    We investigate the possibility that in the Foreign Exchange Market an uninformed speculator finds it convenient to trade on noise in order to gain an infromational advantage she can exploit in future. In a two-period model, we analyze the trade-off she faces between the cost of the "informational investment" and the profits this brings about. Our results give a possible explanation for the large volume of noise trading present in the Foreign Exchange Market.

  • speculative noise trading and manipulation in the Foreign Exchange Market
    Journal of International Money and Finance, 2000
    Co-Authors: Paolo Vitale
    Abstract:

    Abstract We investigate the possibility that in the Foreign Exchange Market uninformed speculators find it convenient to trade on noise in order to gain an informational advantage they can exploit in future. In a two-period model, we analyze the trade-off between the cost of the “informational investment” and the profits this brings about, studying the optimal manipulation strategy under different hypotheses on the activity of Market participants. Our results give a possible explanation for the presence of noise trading in the Foreign Exchange Market.

  • sterilised central bank intervention in the Foreign Exchange Market
    Journal of International Economics, 1999
    Co-Authors: Paolo Vitale
    Abstract:

    Abstract We have studied the signalling role of sterilised Foreign Exchange intervention using a Market micro-structure framework. We have assumed that the monetary authorities intervene in the Foreign Exchange Market in order to target the value of a Foreign currency. Since the fundamentals of the Foreign currency are not necessarily equal to this objective, the central bank does not have an incentive to reveal its intervention operations and no announcement on its activity will be credible. Under these circumstances, secret sterilised intervention can be used to influences agents' expectations and Exchange rates, as the central bank possesses private information on these fundamentals. A surprising result of our analysis is that while announcements on the objective of intervention are not credible, they are not even desirable. In fact, the Foreign Exchange Market is more efficient when this objective is secret than when it is common knowledge, because in the former case the central bank is more aggressive and reveals more of its private information.

Paul A Weller - One of the best experts on this subject based on the ideXlab platform.

  • the adaptive Markets hypothesis evidence from the Foreign Exchange Market
    Journal of Financial and Quantitative Analysis, 2009
    Co-Authors: Christopher J Neely, Paul A Weller, Joshua M Ulrich
    Abstract:

    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.

  • the adaptive Markets hypothesis evidence from the Foreign Exchange Market
    2009
    Co-Authors: Christopher J Neely, Paul A Weller, Joshua M Ulrich
    Abstract:

    We analyze the intertemporal stability of returns to technical trading rules in the Foreign Exchange Market by conducting true, out-of-sample tests on previously published 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 mid-1990s for filter and moving average (MA) rules. Returns to less-studied rules, such as channel, ARIMA, genetic programming and Markov rules, also have declined, but have probably not completely disappeared. The volatility of returns makes it difficult to estimate mean returns precisely. The most likely time for a structural break in the MA and filter rule returns is the early 1990s. These regularities are consistent with the Adaptive Markets Hypothesis (Lo, 2004), but not with the Efficient Markets Hypothesis.

  • intraday technical trading in the Foreign Exchange Market
    Journal of International Money and Finance, 2003
    Co-Authors: Christopher J Neely, Paul A Weller
    Abstract:

    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.

  • the advantage to hiding one s hand speculation and central bank intervention in the Foreign Exchange Market
    Journal of Monetary Economics, 1997
    Co-Authors: Utpal Bhattacharya, Paul A Weller
    Abstract:

    Abstract We analyze an asymmetric information model of sterilized intervention in the Foreign Exchange Market. We characterize an equilibrium in which a central bank with ‘inside information’ about its Exchange rate target trades with risk averse speculators who have private information about future spot rates. The model identifies circumstances in which ‘perverse’ responses to intervention will be observed, i.e. the domestic currency depreciates when the central bank purchases it, and it provides conditions under which the Exchange rate will be highly sensitive to intervention. The model also provides an explanation for two forms of ‘policy secrecy’: (i) secrecy about the scale of an intervention operation is always desirable, (ii) secrecy about the target is sometimes desirable.

Richard K Lyons - One of the best experts on this subject based on the ideXlab platform.

  • tests of microstructural hypotheses in the Foreign Exchange Market
    Journal of Financial Economics, 1995
    Co-Authors: Richard K Lyons
    Abstract:

    This paper introduces a three-part transactions dataset to test various microstructural hypotheses about the spot Foreign Exchange Market. In particular, we test for effects of trading volume on quoted prices through the two channels stressed in the literature: the information channel and the inventory-control channel. We find that trades have both a strong information effect and a strong inventory-control effect, providing support for both strands of microstructure theory. The bulk of equity-Market studies also find an information effect; however, these studies typically interpret this as evidence of inside information. Since there are no insiders in the Foreign Exchange Market, this finding suggests a broader conception of the information environment, at least in this context.

  • tests of microstructural hypotheses in the Foreign Exchange Market
    Journal of Financial Economics, 1995
    Co-Authors: Richard K Lyons
    Abstract:

    Abstract Data in this paper support both the inventory-control and asymmetric-information approaches to microstructure theory. Strong evidence of an inventory-control effect on price is new. The transactions dataset chronicles a trading week of a spot Foreign Exchange dealer whose daily volume averages over $1 billion. In addition to controlling inventory with his own price, the dealer also lays off inventory at other dealers' prices and through brokers. These results highlight the importance of inventory-control theory in understanding trading in this Market.