Foreign exchange trading models and market behavior

✍ Scribed by Ramazan Gençay; Michel Dacorogna; Richard Olsen; Olivier Pictet

• Publisher: Elsevier Science
• Year: 2003
• Tongue: English
• Weight: 209 KB
• Volume: 27
• Category: Article
• ISSN: 0165-1889
• DOI: 10.1016/s0165-1889(02)00049-0

✦ Synopsis

The contributions of this paper are twofold. First, the performance of a widely used commercial real-time trading model is compared with a simple exponential moving average model. Second, the trading models are used as diagnostic tools to evaluate the statistical properties of foreign exchange rates.

The results presented in this paper have a general message to the standard paradigm in econometrics. It is not su cient to develop sophisticated statistical processes and choose an arbitrary data frequency (e.g. one week, one month, annual, etc.) claiming afterwards that this particular process does a "good job" of capturing the dynamics of the data generating process. In ÿnancial markets, the data generating process is a complex network of layers where each layer corresponds to a particular frequency. A successful characterization of such data generating processes should be estimated with models whose parameters are functions of intra and inter frequency dynamics. In other ÿelds, such as in signal processing, paradigms of this sort are already in place. Our understanding of ÿnancial markets would be increased with the incorporation of such paradigms into ÿnancial econometrics. Our trading models, within this perspective, help to observe this subtle structure as a diagnostic tool.