a comparison of ma and rsi returns with exchange rate intervention
DESCRIPTION
A comparison of MA and RSI returns with exchange rate intervention. Group Members: Zhang Duo A0075433 Tang Wai Hoh A0075413 Fan Li A0075376. outline. Introduction of the paper Data & Trading Strategy Methodology & Empirical Results Work in Progress & Future Exploration. - PowerPoint PPT PresentationTRANSCRIPT
A comparison of MA and RSI returns
with exchange rate intervention
Group Members: Zhang Duo A0075433Tang Wai Hoh A0075413Fan Li A0075376
outline
• Introduction of the paper• Data & Trading Strategy• Methodology & Empirical Results• Work in Progress & Future
Exploration
Introduction of the Paper
Introduction of the Paper
• TOPIC: A comparison of MA and RSI returns with
exchange rate intervention
• Authors: Thomas C. Shik and Terence Tai-Leung Chong
• Structure: Two Trading Strategies: MA & RSI Six Currencies: AUD/USD, CHF/USD, DEM/USD,
JPY/USD, BP/USD, EUR/USD Three Panels: Panel A: All observations Panel B: Remove domestic & foreign interests Panel C: Remove factor of intervention
Report StructureTrading Rules
MA(N=10,20,50,150)
RSI(N=10,20,50,150)
Empirical Results
Panel A All observations
Test Model:ObsMeant-statp-valueSharpe(1)Sharpe(2)
Test Model:ObsMeant-statp-valueSharpe(1)Sharpe(2)
(1)RSI&MA: positive risk adjusted returns on JPY/USD & DEM/USD
(2)RSI>MA for DEM/USD;
MA>RSI for JPY/USD
Panel BRemove domestic & foreign interest
Test Model:ObsMeant-statp-valueSharpe(1)Sharpe(2)
Test Model:ObsMeant-statp-valueSharpe(1)Sharpe(2)
(3) Little impact on trading rules performance
Panel CRemove factor of intervention
Test Model:ObsMeant-statp-valueSharpe(1)Sharpe(2)
Test Model:ObsMeant-statp-valueSharpe(1)Sharpe(2)
(4) Profitability of trading rules positively related to interventions
Data
DATA of the PaperFX Rate Interest Rate Intervention
Data
AUD/USD Noon buying rates in New York time
Unofficial market 11 a.m. call rates series
The Reserve Bank of Australia (1983-2002)
CHF/USD Swiss Call money rate Swiss National Bank(1986-1995)
DEM/USD Daily overnight interest rate data at 0900GMT from BIS
Deutsche Bundesbank
JPY/USD Ministry of Finance Japan(since 1991)
BP/USD
EUR/USD
Risk-free Rate Daily interest rate of 30-year US Treasury Bonds
DATA of Our Research• Foreign Exchange Rates Resource 1 : H.10 Federal Reserve Statistical Release (since
1971) http://www.federalreserve.gov/releases/h10/hist/default1989.htm Resource 2: Yahoo Finance (since 27 Dec 2007) http://sg.finance.yahoo.com/q/hp?s=GBB
• Interest Rates(Some) Resource 3: Bloomberg (since 2001)
• Intervention Data(Only One) Resource 4: JPY/USD Intervention Data(Apr 1991-Mar 2001) http://www.mof.go.jp/english/feio/e034_133.htm
• Risk-free Rate(Done) Resource 5: H.15 Federal Reserve Statistical Release (since
1977) http://www.federalreserve.gov/releases/h15/data/Business_day/H15_TCMNOM_Y30.txt
Trading Strategy
ACF s for Exchange Rate Series• Serially Correlated possible to make profits by investigating its history
1ln lnt t ty e e
t k t k ty y AUD/USD
CHF/USD
DEM/USD
JPY/USD (A)
JPY/USD (B)
BP/USD
EUR/USD
ACF(1)s.e.
0.0376640.016639
0.0338780.019953
0.0429370.016017
0.0702680.022661
0.0482420.022619
0.0747090.015991
0.0014570.025090
ACF(2)s.e.
ACF(3)s.e.
-0.0450370.016616
0.0627980.022715
-0.0546010.022610
ACF(4)s.e.
ACF(5)s.e.
Serially Correlated!!
Define: Regression:
Trading Strategies
• Definition
• Long the USD if
• Short the USD if
1
0
1( )
N
t t ii
MA N PN
( )t tP MA N
( )t tP MA N
1
1 101
10
( ) { }( ) 100
| |
N
t i t i t i t iit N
t i t ii
P P I P PRSI N
P P
( ) 50tRSI N
( ) 50tRSI N
• Definition
• Long the USD if
• Short the USD if
MAMA
Note: Pt : Exchange rate at time t, N: Number of days.
RSIRSI
Trading Strategies
RSI in the paper-SMA
RSI in the paper-SMA
100100 100
1 1( )t
RSRSI N
RS RS
SMA( , )
SMA( , )
U nRS
D n
RSI in General FormRSI in General Form
( , )
( , )
Average U tRS
Average D t
1
0
1( )
N
t t ii
SMA N PN
----Average of N days up prices----Average of N days down prices
RSI in algoquant-EMA
RSI in algoquant-EMA
EMA( , )
EMA( , )
U nRS
D n
1(1 ()( ) )t ttE P EMA N MA N
Methodology & Empirical Results
Methodology & Empirical Result
• Mean Annual Returns & Standard Deviation
• Hypothesis Testing t-statistic
• Sharpe Ratios
Mean Annual Returns
• Window widths for the study are 10-, 20-, 50- and 150- days.
• Daily returns:
• Removing interest rate differentials:
signalsellfor
signalbuyfor
rrPP
t
tttttt
1
1
1ln1lnlnln *1
tttt PP lnln 1
Note: rt* = foreign interest rate, rt is the domestic interest rate
Total Returns
• Sum of daily returns:
• Average return from time 0 to T:
• Mean Annual Returns is computed by multiplying with the number of trading days.
1
0
T
it
TT
T
i t
1
0
Hypothesis Testing• Let μ and σ be the mean and standard deviation
of the daily returns respectively.
• Sample mean:
• Hypothesis H0 : μ = 0 vs H1: μ ≠ 0 tested using.
- Efficient market with no arbitrage has a mean zero.
• S = sample standard deviation
TN 2,~
TSt
/
Sharpe Ratios
• be the mean annual return and be standard deviation.
• Rf is the risk-free rate.
S
S
Sharpe
1
S
RSharpe f
2
measure of the excess return (or risk premium) per unit of risk in an investment asset or a trading strategy
Statistic terms in the Tables
• Obs. : number of observations.
• Mean : mean annual return in percentage.
• Std (daily returns) : standard deviation of the daily returns.
• t-stat : t-statistic value.
• P-value : tail probability generated by the observed test statistic under the null hypothesis.
Report Structure
Trading Rules for JPY/USD & DEM/USD
MA(N=10,20,50,150)
JPY/USD
RSI(N=10,20,50,150)
DEM/USD
Empirical Results
Panel A (all obs)
Test Model: MA10Obs: 1932Mean: 12.27%Std: 0.63%t-stat: 3.40P-value: 0.00Sharpe(1): 1.23Sharpe(2): 0.58
Test Model: RSI 10Obs: 3882Mean: 7.50%Std: 0.69%t-stat: 2.70P-value: 0.01Sharpe(1): 0.69Sharpe(2): 0.17
(1)RSI&MA: positive risk adjusted returns on JPY/USD & DEM/USD
(2)RSI>MA for DEM/USD;
MA>RSI for JPY/USD
Panel B(remove demostic &
foreign interest)
Test Model: MA10Obs: 1932 Mean: 12.15%Std: 0.63%t-stat: 3.36P-value: 0.00Sharpe(1): 1.21Sharpe(2): 0.57
Test Model: RSI 10Obs: 3882Mean: 7.41%Std: 0.69%t-stat: 2.66P-value: 0.01Sharpe(1): 0.68Sharpe(2): 0.17
(3) Little impact on trading rules performance
Panel C(remove factor of intervention)
Test Model: n.aObs: n.aMean: n.aStd: n.a t-stat: n.aP-value: n.aSharpe(1): n.a Sharpe(2): n.a
Test Model: RSI 10Obs: 3534Mean: 5.45% Std: 0.67%t-stat: 2.12P-value: 0.03Sharpe(1): 0.52Sharpe(2): -0.01
(4) Profitability of trading rules positively related to interventions
Work in Progress & Future Exploration
Work in Progress
EUR/USD – 50-days window width
Work in Progress
EUR/USD – 50-days window width
Work in Progress
JYN/USD – 50-days window width
Work in Progress
JYN/USD – 50-days window width
Work in Progress
GBP/USD – 10-days window width
Work in Progress
GBP/USD – 10-days window width
Current Challenges
• Quotation data other than Yahoo Finance
• How to store the data/dates at the crossover
points and then to do the return analysis
(mean, std, t-stat, P-value, Sharpe ratios)
• Obstacles in getting information regarding
government interventions and interest rate
Further Exploration
• Simulate results under Panel A & C (Domestic/Foreign interest rates & GOV
interventions)
• Introducing other MA model (i.e. EMA)
• Include transaction cost
• Include two more bounds for RSI a) >70 – overbought - SELLb) <30 – oversold - BUY
RSI with 30, 50, 70 bounds
Hit 30 from above:Buy
Hit 30 from above:Buy
Hit 70 from below:Sell
Hit 70 from below:Sell
Hit 50 from above:Sell
Hit 50 from above:Sell
Hit 50 from below:Buy
Hit 50 from below:Buy
Q & AThank You!