Are Currency Returns Really Predictable

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Are Currency Returns Really Predictable

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Author : Michael D. Goldberg
language : en
Publisher:
Release Date : 2017

Are Currency Returns Really Predictable written by Michael D. Goldberg and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2017 with categories.

This paper provides evidence suggesting that currency returns are not predictable. We find that the Bilson-Fama regression is not only unstable, but the instability is triggered by novel historical events. The novelty of the events implies that the structural change underpinning returns cannot be characterized ex ante by a probability rule. We show that allowing for unforeseeable structural change leads to considerably more evidence of a time-varying risk premium. It also reveals temporary correlations involving the market's forecast error. These correlations, like the bias of forward rate predictions, change at times and in ways that are not predictable.

Price Efficiency And Return Predictability In International Currency Markets

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Author : Robert Glenn Murdock
language : en
Publisher:
Release Date : 1997

Price Efficiency And Return Predictability In International Currency Markets written by Robert Glenn Murdock and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 1997 with Currency question categories.

Predictability Of Currency Returns

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Author : Akmal Kurbanov
language : en
Publisher:
Release Date : 2010

Predictability Of Currency Returns written by Akmal Kurbanov and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2010 with categories.

Can we make an accurate foreign exchange rate forecast if we know what is the market's best "guess" on future direction of that rate? The author attempts to answer this question by investigating the predictive ability of risk-reversals - market traded derivative contracts that measure the expected skewness of exchange rate distribution. In order to find evidence in favor or against the use of risk reversals based forecasts the paper presents analysis of recent research in selected subject. The author applies econometric methods based on previous empirical works, to quantify the relationship between EURUSD exchange rates and 1 week ahead market expectations embedded in current prices risk reversals for the period of 01/2006-04/2010. The results obtained in the sample period show that variation in weekly changes of risk reversals can explain up to 55% in variation of the same period currency returns pointing to significant positive relationship. But the outcome of out of sample predictability test, in selected specification, could not beat benchmark Random Walk model with RMSE ratio of 1.06. Despite the low predictability, the evidence on risk reversals documented in this research paper contributes to existing literature by using weekly sampling and direct market quotes of risk reversals as explanatory variables to avoid "error in estimation" problem. Moreover the period before and after the events of fall 2008 is analyzed as well as robustness checked within several sampling methods. The debate of using options market implied expectations for accuracy of forecasts is still open and it seems that there is more uncovered issues left for research.

Predicting Currency Returns And Exchange Rate Fluctuations

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Author : Doron Avramov
language : en
Publisher:
Release Date : 2019

Predicting Currency Returns And Exchange Rate Fluctuations written by Doron Avramov and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2019 with categories.

This paper motivates a novel predictor of currency returns and exchange rate changes, the lagged foreign interest rate. This variable is the dividend-to-price analogue in currency markets and its forecasting ability is incremental to established predictors. Currency-return predictability is primarily attributable to time-series (versus cross-sectional) variation in the foreign interest rate. Then, forward premium regressions that exploit exchange rate predictability consistently generate positive slopes for both individual counties and the aggregate. From a U.S. investor's perspective, currency strategies that condition on the lagged foreign interest rate deliver significant alphas and outperform the dollar carry-trade strategy.

Predictability And Good Deals In Emerging And Developed Currency Markets

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Author : Richard M. Levich
language : en
Publisher:
Release Date : 2018

Predictability And Good Deals In Emerging And Developed Currency Markets written by Richard M. Levich and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2018 with categories.

We study the predictability of forward and spot exchange rates of currencies of emerging and developed economies from 1994 to 2016 to shed light on the efficiency of currency markets and how it has evolved over this time. For the currencies of emerging economies, our analysis of rates of return on forward contracts finds some evidence of excess-predictability, especially in the earlier parts of the sample period, consistent with the view that this portion of the foreign exchange market has only become efficient in recent times. When we turn our attention to excess-returns computed from spot exchange rates and spot interest rates, however, we find much less predictability. In particular, over our full sample period, we find no evidence of excess-predictability, in contrast with the results reported by Hsu et al. (2016) but in agreement with Kuang et al. (2014). The different predictability of spot excess-returns and rates of return on forward contracts is a manifestation of the widespread violation of covered interest parity which emerged with the onset of the 2008 financial crisis.

Foreign Exchange Predictability During The Financial Crisis

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Author : Stanislav Anatolyev
language : en
Publisher:
Release Date : 2017

Foreign Exchange Predictability During The Financial Crisis written by Stanislav Anatolyev and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2017 with categories.

In this paper, we study the effectiveness of carry trade strategies during and after the financial crisis using a flexible approach to modeling currency returns. We decompose the currency returns into multiplicative sign and absolute return components, which exhibit much greater predictability than raw returns. We allow the two components to respond to currency-specific risk factors and use the joint conditional distribution of these components to obtain forecasts of future carry trade returns. Our results suggest that the decomposition model produces higher forecast and directional accuracy than any of the competing models. We show that the forecasting gains translate into economically and statistically significant (risk-adjusted) profitability when trading individual currencies or forming currency portfolios based on the predicted returns from the decomposition model.

Characterizing Predictable Components In Excess Returns On Equity And Foreign Exchange Markets

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Author : Geert Bekaert
language : en
Publisher:
Release Date : 1991

Characterizing Predictable Components In Excess Returns On Equity And Foreign Exchange Markets written by Geert Bekaert and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 1991 with Capital investments categories.

The paper characterizes predictable components in excess rates of returns on major equity and foreign exchange markets using lagged excess returns, dividend yields, and forward premiums as instruments. Vector autoregressive techniques demonstrate one-step-ahead predictability and provide implied long-horizon statistics. We estimate latent variable models as constrained counterparts to the VARs. The predictability of returns is related to asset pricing models by examining the volatility bounds on intertemporal marginal rates of substitution.

The Effects Of Exchange Rate Market Disequilibrium On Stock Price Predictability And Property Stock Performance Under A Currency Board System

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Author : C. Cheung
language : en
Publisher:
Release Date : 2017-01-26

The Effects Of Exchange Rate Market Disequilibrium On Stock Price Predictability And Property Stock Performance Under A Currency Board System written by C. Cheung and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2017-01-26 with categories.

This dissertation, "The Effects of Exchange-rate Market Disequilibrium on Stock Price Predictability and Property Stock Performance Under a Currency Board System" by C, Cheung, 張楚強, was obtained from The University of Hong Kong (Pokfulam, Hong Kong) and is being sold pursuant to Creative Commons: Attribution 3.0 Hong Kong License. The content of this dissertation has not been altered in any way. We have altered the formatting in order to facilitate the ease of printing and reading of the dissertation. All rights not granted by the above license are retained by the author. Abstract: Abstract of thesis entitled The Effects of Exchange-Rate Market Disequilibrium on Stock Price Predictability and Property Stock Performance under a Currency Board System Submitted by Victor C. Cheung for the degree of Doctor of Philosophy at the University of Hong Kong in May 2005 This thesis examines how the Exchange-rate Market Disequilibrium (the EMD) resulting from a significant shock can lead to the short-term stock price predictability in a developed and open stock market under a Currency Board system. A significant shock is defined as any external shock giving rise to the EMD such that: (1) the fixed exchange-rate becomes over-valued and necessitates the operation of the abnormal mechanism of the Currency Board to maintain it; and (2) the market fears that devaluation or de-linking will have a long-term detrimental effect on the economy. This study hypothesizes that the EMD causes the short-term stock price predictability. Under a Currency Board system, the stock market is closely linked to the exchange-rate market. When the exchange-rate market is in disequilibrium, an excess-return opportunity arises in the exchange-rate market (that is, trading against the over-valued currency), and then spills over the stock market, for three reasons: (i) a downward asset price adjustment under the currency rigidity, (ii) a confidence crisis resulting from the possible de-linking, and (iii) the negative impact of operations by the Currency Board, such as a rise in the interest rate. Thus, if the government only concentrates on using the Currency Board's operation to uphold the currency in the exchange-rate market, speculators, especially the macro hedge funds, have a good chance to capture the excess returns in the exchange-rate market and/or the stock market. However, in a developed stock market, speculators need to act in collusion to fully capture such excess returns. Because the EMD offers high excess returns and a low downside risk (limited to the loss in the exchange-rate market resulting from the Currency Board's measures) and the number of colluders is relatively small, collusion is possible and sustainable. Since collusion creates the information asymmetry in the stock market, the stock prices become predictable, until collusion or the EMD ceases (for instance, as a result of the government intervention in the stock market or the changes in the fundamentals). To substantiate this hypothesis, this thesis examines the patterns of the stock and exchange-rate returns in Hong Kong in the summer of 1998 (shortly after the Asian financial crisis and during which the exchange-rate was upheld with the interest-rate hikes) to identify the EMD, collusion, and stock price predictability. Our findings support the hypothesis. The results show that (1) the property stock, whose underlying assets are long-lasting, immobile and capital-intensive properties, declined more than the other stocks in this period, suggesting that it was an EMD period in which the market felt that de-linking would have a detrimental long-term effect on the economy; (2) the collusion signals prevailed in this period, indicating the sustainable collusive trading activities; and (3) the stock price was predictable in this period, and unpredictable otherwise. This stud

Foreign Exchange Risk And The Predictability Of Carry Trade Returns

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Author : Gino Cenedese
language : en
Publisher:
Release Date : 2014

Foreign Exchange Risk And The Predictability Of Carry Trade Returns written by Gino Cenedese and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2014 with categories.

This paper provides an empirical investigation of the time-series predictive ability of foreign exchange risk measures on the return to the carry trade, a popular investment strategy that borrows in low-interest currencies and lends in high-interest currencies. Using quantile regressions, we find that higher market variance is significantly related to large future carry trade losses, which is consistent with the unwinding of the carry trade in times of high volatility. The decomposition of market variance into average variance and average correlation shows that the predictive power of market variance is primarily due to average variance since average correlation is not significantly related to carry trade returns. Finally, a new version of the carry trade that conditions on market variance generates performance gains net of transaction costs.

Out Of Sample Exchange Rate Predictability In Emerging Markets

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Author : Ibrahim Jamali
language : en
Publisher:
Release Date : 2019

Out Of Sample Exchange Rate Predictability In Emerging Markets written by Ibrahim Jamali and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2019 with categories.

We provide an in-depth analysis of the predictive ability of models with fundamentals and technical indicators for fourteen emerging market currencies. Our findings suggest that the forecasts from the symmetric Taylor rule as well as from a predictive regression exploiting the informational content of the momentum indicator are statistically superior to those of the random walk and other competing models. We combine the forecasts from the two best performing models via simple techniques and assess the economic significance of the out-of-sample forecasts using a trading strategy based on the sign of the predicted currency returns. Our economic significance results demonstrate that the symmetric Taylor rule, momentum and combination forecasts generate the largest net-of-transactions costs and risk-adjusted returns.