FX Market Research Articles

Optimal liquidation strategy for cryptocurrency marketplaces using stochastic control

The cryptocurrency marketplace provides liquidity receiving orders from investors. This requires managing the appropriate inventory risk. An optimal liquidation strategy based on stochastic control has been proposed for such inventory risk management problems of FX dealers. However, the cryptocurrency market has different characteristics than the FX market. Therefore, we propose an optimal liquidation strategy based on stochastic control that considers the characteristics of the cryptocurrency marketplace. We also perform an empirical study using the trading data of a cryptocurrency marketplace. We show that order bias affects the optimal liquidation strategy, and our proposed method is more effective than simple liquidation strategies.

Which Witch is Which? Deconstructing the FX Markets Activity

Which Witch is Which? Deconstructing the FX Markets Activity

Large Spillover Networks of Nonstationary Systems

This article proposes a vector error correction framework for constructing large consistent spillover networks of nonstationary systems grounded in the network theory of Diebold and Y ilmaz. We aim to provide a tailored methodology for the large nonstationary (macro)economic and financial system application settings avoiding technical and often hard to verify assumptions for general statistical high-dimensional approaches where the dimension can also increase with sample size. To achieve this, we propose an elementwise Lasso-type technique for consistent and numerically efficient model selection of VECM, and relate the resulting forecast error variance decomposition to the network topology representation. We also derive the corresponding asymptotic results for model selection and network estimation under standard assumptions. Moreover, we develop a refinement strategy for efficient estimation and show implications and modifications for general dependent innovations. In a comprehensive simulation study, we show convincing finite sample performance of our technique in all cases of moderate and low dimensions. In an application to a system of FX rates, the proposed method leads to novel insights on the connectedness and spillover effects in the FX market among the OECD countries.

Structural change in the correlation, return and volatility spillovers: evidence from the oil, stock and exchange rate markets in the United States

The present study employed a bivariate GJR-GARCH-MX-t model with a Structural break (SB) to explore the status variation of five financial features in three markets in the United States (US) that arose as a result of the shocks from both the global financial crisis (GFC) and subsequently quantitative easing (QE) policies. The results showed that the GFC and QE first cause a SB at the oil market and the stock market; the SB did not occur in the exchange rate (FX) market. Moreover, before and after the SB, the status of the three types of pairwise markets′ interaction indicators was significantly different, especially for the oil-stock paired market data. However, the status of the two single market indicators was almost the same, especially for the FX market data. In addition, during the two subperiods the stock market and the FX market dominated in the case of the return and volatility spillovers, respectively.

Hungarian forint FX swap spreads during and beyond crisis times

Incentivised by a wide range of research discussing mispricing in USD related swap markets, the paper aims at discovering the factors contributing to the deviation of the 3-month FX swap points in the EURHUF and USDHUF market from their CIP based values primarily between the period January 2008 and December 2018 and with an extension to the end of 2021 using daily and monthly Bloomberg quotes. The period examined can be divided into three plus one subperiods as concerns FX swap spreads, largely determined by the effects of the global financial crisis and the volume of FX loans. Apart from the most important classes of variables explaining FX swap spreads, counterparty, funding and market liquidity risk indicators, the literature identifies, policy variables were also involved in the analysis. During and in the aftermath of the 2008 global financial crisis, the MNB applied various kinds of FX swap tenders to ease FX liquidity tensions in the Hungarian interbank market, and continued providing such operations even after the conversion of household FX loans to domestic currency. The results of VARX estimations suggest that indicators of market and liquidity tension, counterparty risk mostly positively contributed to the widening of FX swap spreads, in addition, policy intervention had a spread dampening impact throughout most of the period. The paper confirms that central bank FX swap market participation can mitigate mispricing especially in turbulent times.

Information Jumps, Liquidity Jumps, and Market Efficiency

We formulate a measure of information efficiency in a general, no-arbitrage semimartingale model of the price process. The market quality measure is applied to a high-frequency dataset from the interdealer FX market to identify changes in market efficiency after a decimalization of tick size.

Geometric progression and relative strength index applied to FX hedging

This research aims at profit maximization and loss minimization in any FX market trading. A geometric progression (geometric sequence), is said to be a non-zero number progression or sequence in which each term following the first is obtained via multiplying the prior by the common ratio, which is a predetermined non-zero value. This method seeks to open an opposite position to an existing initial position in order to hedge that initial position in the event that the market moves against our trade. There are a number of mathematical models to develop new hedging strategies for Forex trading. Due to the apparent high level of unpredictability in price movement, forecasting the future of a stock price is a challenging endeavor. The research would like to study one with geometric progression in particular. In other words, every number can be entered as multiple integer of a different number. Thus, 1, 2, 4, 8,..., 2n is a step forward. Smart traders never take more risks than their capital, however, the otherwise is viewed and considered here.

Price Discovery of Limit Orders in the FX Market

Price Discovery of Limit Orders in the FX Market

Uninformed but Predictable: Corporate Trading and Price Discovery in Over-the-counter FX Markets

Uninformed but Predictable: Corporate Trading and Price Discovery in Over-the-counter FX Markets

Dealer Disagreement and Asset Prices in FX Markets

Dealer Disagreement and Asset Prices in FX Markets

Application of the Hurst coefficient, calculated with the use of the Siroky method on financial markets

The paper analyses the Hurst exponents calculated with the use of the Siroky method in two time intervals of 625 and 1250 sessions for the group of 570 financial instruments (Warsaw Stock Exchange equities – 320, equity indexes – 7, commodities – 41, and FX market – 135). The study also covers an analysis of the normality of the distribution of logarithmic rates of return, and the verification of statistical hypotheses with the use of the following statistical tests: Jarque-Bera (JB), Shapiro-Wilk (SW), and d’Agostino-Pearson (DA).In the second part of the paper, the change of the Hurst coefficient over time was analysed, while in the third part two linear regressions of the form H(t) = a + m ∙ t were performed for each of the analysed assets, as well as the determination factor R2. This part of the study aims to answer the question whether the slope of the regression line has a positive or negative value and what the quality of such a fit is with the use of linear regression. Such an analysis enables to observe changes in the fractal dimension, and thus the risk in financial markets over a long period of time.The main conclusion that was drawn from the research may be formulated as follows: the value of the H exponents decreased in the analysed time windows, which means an increase in the fractal dimension (d), and thus the investment risk in financial markets. The obtained results can be used in the process of constructing an investment portfolio in financial markets.The research is part of the ongoing discussion on the effectiveness of financial markets.

Turn-of-the-month effect, FX influence, and efficient market hypothesis: new perspectives from the Johannesburg stock exchange

ABSTRACT This paper examines the Turn of the Month (TOM) effect in the highly capitalized emerging South African stock market. We use data from the FTSE/JSE Afr8ica All Shares Index (JALSH) and the USDZAR FX market for the period 31.12.1998-31.12.201. We provide empirical evidence that TOM is present in the S. African stock market, but there is a non-TOM anomaly in the FX market. Thus, the S. African stock market enables us to gain new perspectives on the study of the TOM effect. Specifically, using an optimization algorithm, we are able to identify the optimal intra-month period in the JALSH by examining it in both the local currency (ZAR) and in USD. Moreover, we show that the performance in the USDZAR FX market has an impact: (a) on the domestic stock market’s performance (JALSH in ZAR), and (b) on the TOM effect. Finally, we present some practical investment strategies based on the TOM effect which can outperform the stock market and prove beneficial for investors trading in USD.

Pricing Implications of Covariances and Spreads in Currency Markets

Abstract We introduce a covariance and spread (i.e., exchange rate forward discount) adjusted carry factor that prices the cross-section of FX market returns, where many other single- and multifactor models fail. Both the covariance matrix of exchange rate growths and forward discounts contain important information for pricing that is not captured by well-known factors. The time-varying conditional covariance matrix and forward discounts forecast future realized currency returns. (JEL F31, F37, G12, G15, G17)

What Drives Dollar Funding Stress in Distress?

We study the forces driving dollar funding stress under adverse market conditions for Asia-Pacific economies. We find that the response of dollar funding conditions to changes in macro-financial variables differs significantly between orderly and turbulent markets. In orderly markets, idiosyncratic dollar strength, currency volatility and monetary policy divergence are key factors affecting the stress for the economy. Currency expectations and FX market liquidity also play an important role in determining long-term funding pressure. In turbulent markets, the effect of these variables, except idiosyncratic dollar strength and currency volatility which retain a strong influence, diminishes or even vanishes. Instead, the credit worthiness of the government and corporate sectors, which is found to have little impact under normal market conditions, emerges as a major stress determinant, and becomes increasingly influential as adversity intensifies.

Information content of order flows in the FX market: importance of nonfundamental factors

PurposeThe purpose of the paper is to show that order flows determine exchange rate dynamics because they carry information about nonfundamental factors besides macroeconomic fundamentals.Design/methodology/approachTo understand the role of nonfundamental factors in driving order flows, this study uses two approaches. Initially, Evans and Rime (2016) VAR framework is followed to study the incremental information transmitted by order flow compared to macroeconomic variables. Then, the study uses the settings in which Rime et al. (2010) conduct their empirical work, which gives the researcher more latitude in specifying the identity of the factors that drive order flows.FindingsThe findings evidence that order flows explain the dynamics of the TND/USD exchange rate. The results highlight that order flows convey information about technical strategies, the currency systematic factors and political risk. This study also documents the presence of a Ramadan effect in exchange rates and order flows.Originality/valueThis study makes four contributions to the literature. First, it complements the literature on the FX microstructure of emerging markets. The study investigates the information content carried by order flows, while the previous literature has focused solely on examining the explanatory power of order flows to explain exchange rates in emerging countries. The second contribution is that the study demonstrates formally that order flows determine exchange rates because they transmit information about nonfundamental factors. Third, this study is the first to examine whether order flows convey information about technical analysis. Four, the study relates order flow to nontraditional factors that are relevant to the Tunisian FX market.

Entangled risks in incomplete FX markets

We introduce the concept of risk entanglement in a preference-free setting to jointly explain the exchange rate volatility, cyclicality, and currency risk premia in the data. Risk entanglement specifies a subset of incomplete market models, in which nondiffusive or nonlog-normal shocks to exchange rates are not fully spanned by asset returns. When risks are entangled, there exist multiple pricing-consistent exchange rates, but none of them are equal to the ratio of the stochastic discount factors (SDFs) or their projections. Decoupling the exchange rate from the SDFs allows us to address key FX market patterns that are puzzling in international finance.

Does disease outbreak news impact equity, commodity and foreign exchange market? Investors' fear of the pandemic COVID-19

PurposeMarket volatility is subject to good or bad news and even responses to fake news and policy changes. In this piece of work, the authors consider the effects of the recent COVID-19 pandemic event on the global equity market, commodities and FX market, measured in terms of the investors' fear index.Design/methodology/approachIn this empirical work, the authors employ time series-based regression models followed by augmented dummy regressions and growth of the COVID-19.FindingsCOVID-19-induced investors' fear appears to be higher in the equity segment for the first time since the market crash of 1987 and the global financial crisis of 2008–2009. Furthermore, this disease outbreak shock has been more pronounced in terms of crude oil prices. Besides, a market participant in the commodity and FX market has paid a disproportionate premium to protect such pandemic development. Findings show that Options act as the best hedge against an uncertainty like COVID-19 and that option-based implied volatility is the best measure of investors' fear and market volatility.Practical implicationsThis study has practical implications for the financial markets, e.g. (1) Contagious disease outbreak news matters for the equity, commodity, and foreign exchange markets – empirical outcome validates the theory of market efficiency valid for the Options. (2) Option's implied volatility is the best indicator of investor fear measured for the unprecedented economic news. Further implication holds for the policymakers and society, e.g. (1) The unavailability of short-selling could be one plausible reason for increased uncertainty and volatility; hence, policymakers should look upon this issue at the exchange level. (2) Any market needs multiple lines of risk management, effective price discovery and attractive liquidity.Originality/valueThe study is novel in terms of presenting market behavior amid COVID-19 across global equity markets and commodities and FX markets.

Global Equity Correlation in International Markets

We present empirical evidence that the innovation in global equity correlation is a viable pricing factor in international markets. We develop a stylized model to motivate why this is a reasonable candidate factor and propose a simple way to measure it. We find that our factor has a robust negative price of risk and significantly improves the joint cross-sectional fits across various asset classes, including global equities, commodities, sovereign bonds, foreign exchange rates, and options. In exploring the pricing ability of our factor on the FX market, we also shed light on the link between international equity and currency markets through global equity correlations as an instrument for aggregate risks. This paper was accepted by Karl Diether, finance.

Towards an explanation of the Euro FX market reaction in the EU: A review of European integration during the EU crises

We review market participants' actions and the EU afterthe introduction of the euro and during the crises period and Brexit process. The crucial factor is the feedback effect in the reactions of the market participants and the EU. The euro was introduced in a compromised monetary union agreement, essentially underlining the European integrative process issues that were highlighted by the euro crises. Hence, for this reason, it is hard to explain the euro crises without referencing the European integration theories. On the other hand, it is difficult to understate the behavioural factors, including greed and fear, in the full explanation of thecrises. At the heart of this research is the introduction of a new model of testing the stability of the market extending the variance bound test of (Fakhry & Richter, 2015) underpinned by a Markov Switching GARCH model. We analyse the stability of the Euro FX Market from 1st January 1999 to 31st December 2019. We found a mixture of over and under reactions defining the three sub-periods which given the Euro heuristic influencing both the market participants’ and EU’s views seem to be an acceptable result. Keywords. Behavioural Finance, EU Integration, Euro, Euro Crises, Long/Short Run, Market Stability. JEL. C51, D81, G01, G02, H77.

Testing the forward volatility unbiasedness hypothesis in exchange rates under long-range dependence

This paper analyses the unbiasedness hypothesis between spot and forward volatility, using both the actual and the continuous path of realised volatility, and focusing on long-memory properties. For this purpose, we use daily realised volatility with jumps for the USD/EUR exchange rate negotiated in the FX market and employ fractional integration and cointegration techniques. Both series have long-range dependence, and so does the error correction term of their long-run relationship. Hence, deviations from equilibrium are highly persistent, and the effects of shocks affecting the long-run relationship dissipate very slowly. While for long-term contracts, there is some empirical evidence that the forward volatility unbiasedness hypothesis does not hold – and, thus, that forward implied volatility is a systematically downward-biased predictor of future spot volatility – for short-term contracts, the evidence is mixed.