With Cross-Border Investments, Realize That Currencies Will Mean Revert March 2021
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The Future of Computer Trading in Financial Markets an International Perspective
The Future of Computer Trading in Financial Markets An International Perspective FINAL PROJECT REPORT This Report should be cited as: Foresight: The Future of Computer Trading in Financial Markets (2012) Final Project Report The Government Office for Science, London The Future of Computer Trading in Financial Markets An International Perspective This Report is intended for: Policy makers, legislators, regulators and a wide range of professionals and researchers whose interest relate to computer trading within financial markets. This Report focuses on computer trading from an international perspective, and is not limited to one particular market. Foreword Well functioning financial markets are vital for everyone. They support businesses and growth across the world. They provide important services for investors, from large pension funds to the smallest investors. And they can even affect the long-term security of entire countries. Financial markets are evolving ever faster through interacting forces such as globalisation, changes in geopolitics, competition, evolving regulation and demographic shifts. However, the development of new technology is arguably driving the fastest changes. Technological developments are undoubtedly fuelling many new products and services, and are contributing to the dynamism of financial markets. In particular, high frequency computer-based trading (HFT) has grown in recent years to represent about 30% of equity trading in the UK and possible over 60% in the USA. HFT has many proponents. Its roll-out is contributing to fundamental shifts in market structures being seen across the world and, in turn, these are significantly affecting the fortunes of many market participants. But the relentless rise of HFT and algorithmic trading (AT) has also attracted considerable controversy and opposition. -
Forecasting Direction of Exchange Rate Fluctuations with Two Dimensional Patterns and Currency Strength
FORECASTING DIRECTION OF EXCHANGE RATE FLUCTUATIONS WITH TWO DIMENSIONAL PATTERNS AND CURRENCY STRENGTH A THESIS SUBMITTED TO THE GRADUATE SCHOOL OF NATURAL AND APPLIED SCIENCES OF MIDDLE EAST TECHNICAL UNIVERSITY BY MUSTAFA ONUR ÖZORHAN IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF DOCTOR OF PILOSOPHY IN COMPUTER ENGINEERING MAY 2017 Approval of the thesis: FORECASTING DIRECTION OF EXCHANGE RATE FLUCTUATIONS WITH TWO DIMENSIONAL PATTERNS AND CURRENCY STRENGTH submitted by MUSTAFA ONUR ÖZORHAN in partial fulfillment of the requirements for the degree of Doctor of Philosophy in Computer Engineering Department, Middle East Technical University by, Prof. Dr. Gülbin Dural Ünver _______________ Dean, Graduate School of Natural and Applied Sciences Prof. Dr. Adnan Yazıcı _______________ Head of Department, Computer Engineering Prof. Dr. İsmail Hakkı Toroslu _______________ Supervisor, Computer Engineering Department, METU Examining Committee Members: Prof. Dr. Tolga Can _______________ Computer Engineering Department, METU Prof. Dr. İsmail Hakkı Toroslu _______________ Computer Engineering Department, METU Assoc. Prof. Dr. Cem İyigün _______________ Industrial Engineering Department, METU Assoc. Prof. Dr. Tansel Özyer _______________ Computer Engineering Department, TOBB University of Economics and Technology Assist. Prof. Dr. Murat Özbayoğlu _______________ Computer Engineering Department, TOBB University of Economics and Technology Date: ___24.05.2017___ I hereby declare that all information in this document has been obtained and presented in accordance with academic rules and ethical conduct. I also declare that, as required by these rules and conduct, I have fully cited and referenced all material and results that are not original to this work. Name, Last name: MUSTAFA ONUR ÖZORHAN Signature: iv ABSTRACT FORECASTING DIRECTION OF EXCHANGE RATE FLUCTUATIONS WITH TWO DIMENSIONAL PATTERNS AND CURRENCY STRENGTH Özorhan, Mustafa Onur Ph.D., Department of Computer Engineering Supervisor: Prof. -
Perspectives on the Equity Risk Premium – Siegel
CFA Institute Perspectives on the Equity Risk Premium Author(s): Jeremy J. Siegel Source: Financial Analysts Journal, Vol. 61, No. 6 (Nov. - Dec., 2005), pp. 61-73 Published by: CFA Institute Stable URL: http://www.jstor.org/stable/4480715 Accessed: 04/03/2010 18:01 Your use of the JSTOR archive indicates your acceptance of JSTOR's Terms and Conditions of Use, available at http://www.jstor.org/page/info/about/policies/terms.jsp. JSTOR's Terms and Conditions of Use provides, in part, that unless you have obtained prior permission, you may not download an entire issue of a journal or multiple copies of articles, and you may use content in the JSTOR archive only for your personal, non-commercial use. Please contact the publisher regarding any further use of this work. Publisher contact information may be obtained at http://www.jstor.org/action/showPublisher?publisherCode=cfa. Each copy of any part of a JSTOR transmission must contain the same copyright notice that appears on the screen or printed page of such transmission. JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact [email protected]. CFA Institute is collaborating with JSTOR to digitize, preserve and extend access to Financial Analysts Journal. http://www.jstor.org FINANCIAL ANALYSTS JOURNAL v R ge Perspectives on the Equity Risk Premium JeremyJ. -
Commodities Favored with Mean Reversion
Market Commentary 1 Energy 3 Bloomberg Commodity Index (BCOM) Metals 6 Agriculture 11 Tables & Charts – January 2018 Edition DATA PERFORMANCE: 14 Overview, Commodity TR, Prices, Volatility Commodities Favored With CURVE ANALYSIS: 18 Contango/Backwardation, Roll Yields, Mean Reversion Forwards/Forecasts MARKET FLOWS: 21 Open Interest, Volume, - Commodities hitting stride with weak greenback, inflation & economic growth COT, ETFs - Energy is a bit too hot, agriculture too cold, metals the steady bull - Commodities set to shine when volatility returns to financial markets - Strong precious vs. industrial metals may be anticipating a bit of stock market normalization Gold Outlook 2018 Webinar, February 22, 11: 00 am EST https://platform.cinchcast.com/ses/s6SMtqZXpK0t3tNec9WLoA~~ Mike McGlone – BI Senior Commodity Strategist BI COMD (the commodity dashboard) Mean Reversion, a Potential Key 2018 Commodity Bull Gaining Stride Theme, Favors Commodities Crude to Copper: Commodity Relative-Value Performance: January +2.0%, Spot +1.9%. Foundation Is Firming. Agriculture is favored vs. energy, (Returns are total return (TR) unless noted) at least in the shorter term, with mean-reversion overdue in corn, the commodity with the most net-short positions, (Bloomberg Intelligence) -- The commodity bull market vs. crude oil (the longest). Energy should stabilize, metals should be just hitting its stride. Relative to its primary remain strong, and grains are ripe to advance about a drivers -- a declining dollar, rising inflation, demand third on some weather normalization. exceeding supply and expanding global economic growth -- the Bloomberg Commodity Spot Index's four-year high Commodities should have an advantage in 2018 vs. in January is on the right path. -
There's More to Volatility Than Volume
There's more to volatility than volume L¶aszl¶o Gillemot,1, 2 J. Doyne Farmer,1 and Fabrizio Lillo1, 3 1Santa Fe Institute, 1399 Hyde Park Road, Santa Fe, NM 87501 2Budapest University of Technology and Economics, H-1111 Budapest, Budafoki ut¶ 8, Hungary 3INFM-CNR Unita di Palermo and Dipartimento di Fisica e Tecnologie Relative, Universita di Palermo, Viale delle Scienze, I-90128 Palermo, Italy. It is widely believed that uctuations in transaction volume, as reected in the number of transactions and to a lesser extent their size, are the main cause of clus- tered volatility. Under this view bursts of rapid or slow price di®usion reect bursts of frequent or less frequent trading, which cause both clustered volatility and heavy tails in price returns. We investigate this hypothesis using tick by tick data from the New York and London Stock Exchanges and show that only a small fraction of volatility uctuations are explained in this manner. Clustered volatility is still very strong even if price changes are recorded on intervals in which the total transaction volume or number of transactions is held constant. In addition the distribution of price returns conditioned on volume or transaction frequency being held constant is similar to that in real time, making it clear that neither of these are the principal cause of heavy tails in price returns. We analyze recent results of Ane and Geman (2000) and Gabaix et al. (2003), and discuss the reasons why their conclusions di®er from ours. Based on a cross-sectional analysis we show that the long-memory of volatility is dominated by factors other than transaction frequency or total trading volume. -
Active, Passive, Or a Third Way?
FEATURE | THE NEW GEOGRAPHY OF INVESTING RETHINKING FOREIGN EXCHANGE IN YOUR INVESTMENT PORTFOLIO: Active, Passive, or a Third Way? By David Cohen ack in 2009 I was fortunate enough Perhaps it’s time we rethink foreign exchange U.S. dollar, but during the past 43 years the to hear a leading bond fund manager (FX). yen has appreciated at an average annual Bspeak about the future. As he held up rate in excess of 3 percent. In January 1971, a $1 bill, he prophesized that one day we Passive currency management is most often the exchange rate of the Japanese yen to the would be telling our grandchildren about the default strategy for the following reasons: U.S. dollar was 358:1, and as of December these little pieces of paper that people used 2013 the exchange rate was about 103:1. to exchange for goods and services. The 1. Short-term currency movements gener- Whether this type of change in fundamen- history-mindful manager had a theory that ally are difficult to predict and the man- tal valuation is the natural evolution for the currency devaluation was the central bank agement of domestic currency valuation currency of a country progressing from an elixir to the developed-market financial fluctuations relative to foreign purchas- emerging market to a developed market is crisis. At the time, it seemed like just a sim- ing power does not factor into portfolio beyond the scope of this article. The data, ple prognostication, but in reality it was a performance evaluations. however, suggest that currency valuations prescient forecast of the beggar-thy-neigh- 2. -
Nber Working Paper Series Mean Reversion in Stock Prices: Evidence
NBER WORKING PAPER SERIES MEAN REVERSION IN STOCK PRICES: EVIDENCE AND IMPLICATIONS James M. Poterba Lawrence H. Summers Working Paper No. 2343 NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge, MA 02138 August 1987 We are grateful to Barry Peristein, Changyong Rhee, Jeff Zweibel and especially David Cutler for excellent research assistance, to Ben Bernanke, John Campbell, Robert Engle, Eugene Fama, Pete Kyle, Greg Mankiw, Julio Rotemberg, William Schwert, Kenneth Singleton, and Mark Watson for helpful comments, and to James Darcel, Matthew Shapiro, and Ian Tonks for data assistance. This research was supported by the National Science Foundation and was conducted while the first author was a Batterymarch Fellow. The research reported here is part of the NBERs research program in Financial Markets and Monetary Economics. Any opinions expressed are those of the authors and not those of the National Bureau of Economic Research. NBER Working Paper #2343 August 1987 Mean Reversion in Stock Prices: Evidence and Implications ABSTRACT This paper analyzes the statistical evidence bearing on whether transitory components account for a large fraction of the variance in common stock returns. The first part treats methodological issues involved in testing for transitory return components. It demonstrates that variance ratios are among the most powerful tests for detecting mean reversion in stock prices, but that they have little power against the principal interesting alternatives to the random walk hypothesis. The second part applies variance ratio tests to market returns for the United States over the 1871-1986 period and for seventeen other countries over the 1957-1985 period, as well as to returns on individual firms over the 1926- 1985 period. -
2 Exploiting Mean Reversion
CITI PRIVATE BANK OUTLOOK 2021 27 2 Exploiting mean reversion CONTENTS 2.1 Reversion to the mean and what it means for portfolios 2.2 Capitalize on distressed opportunities INVESTMENT PRODUCTS: NOT FDIC INSURED · NOT CDIC INSURED · NOT GOVERNMENT INSURED · NO BANK GUARANTEE · MAY LOSE VALUE CITI PRIVATE BANK EXPLOITING MEAN REVERSION OUTLOOK 2021 28 2.1 Reversion to the mean and what it means for portfolios STEVEN WIETING - Chief Investment Strategist and Chief Economist JOSEPH FIORICA - Head of Global Equity Strategy KRIS XIPPOLITOS - Head of Global Fixed Income Strategy The arrival of the worst global pandemic in more than a century moved every asset price in the world, and its departure will do the same. It is time to position portfolios to exploit what comes next. COVID-19 has caused huge economic and financial market disruption, but it is neither unstoppable nor a trend Instead, we believe the pandemic’s impacts are temporary, causing massive valuation distortions in 2020 that will unwind in 2021 Many asset prices and relationships between assets have strayed far from their long-term relationships Just as COVID moved every asset price in the world, the same will occur as it departs We expect a “reversion to the mean,” in which certain sectors will be major beneficiaries These include COVID-cyclical sectors, small-cap equities and some of the most beaten-down national and regional markets After the most significant dispersion of asset prices in history, exploiting this mean reversion will be crucial to your portfolio’s return opportunities in 2021 CITI PRIVATE BANK EXPLOITING MEAN REVERSION OUTLOOK 2021 29 COVID-19 has split the world’s companies prices for 2021. -
U.S. Equity Mean-Reversion Examined
Risks 2013, 1, 162-175; doi:10.3390/risks1030162 OPEN ACCESS risks ISSN 2227-9091 www.mdpi.com/journal/risks Article U.S. Equity Mean-Reversion Examined Jim Liew * and Ryan Roberts Johns Hopkins Carey Business School 100 International Drive, Office 1355, Baltimore, Maryland, 21202, USA * Author to whom correspondence should be addressed; E-Mail: [email protected]; Tel.: +1-410-234-9401. Received: 16 October 2013; in revised form: 13 November 2013 / Accepted: 18 November 2013 / Published: 4 December 2013 Abstract: In this paper we introduce an intra-sector dynamic trading strategy that captures mean-reversion opportunities across liquid U.S. stocks. Our strategy combines the Avellaneda and Lee methodology (AL; Quant. Financ. 2010, 10, 761–782) within the Black and Litterman framework (BL; J. Fixed Income, 1991, 1, 7–18; Financ. Anal. J. 1992, 48, 28–43). In particular, we incorporate the s-scores and the conditional mean returns from the Orstein and Ulhembeck (Phys. Rev. 1930, 36, 823–841) process into BL. We find that our combined strategy ALBL has generated a 45% increase in Sharpe Ratio when compared to the uncombined AL strategy over the period from January 2, 2001 to May 27, 2010. These new indices, built to capture dynamic trading strategies, will definitely be an interesting addition to the growing hedge fund index offerings. This paper introduces our first “focused-core” strategy, namely, U.S. Equity Mean-Reversion. Keywords: Black–Litterman; US stocks; dynamic trading strategy; mean-reversion; quantitative finance; statistical arbitrage 1. Background Recently, we have seen a proliferation of hedge fund replication products. -
Smart Beta and the Pendulum of Mispricing by Vitali Kalesnik, Ph.D
SIMPLYSTATED September 2013 Smart Beta and the Pendulum of Mispricing by Vitali Kalesnik, Ph.D. Stock price movements aren’t as smooth and steady as a pendulum’s arc, but they both exhibit a process of long-run mean reversion. Highs and lows are temporary; prices tend to return to more average levels. Vitali Kalesnik reviews empirical findings on mean reversion in stock prices, discusses its links with the value and small size premia, and considers why arbitrage doesn’t curtail the process. Through rebalancing, he says, Smart Beta can profit from mean reversion. The Research Affiliates approach to equity investment the bob’s average position, it is the place where we are management is based upon the insight that stock prices most likely to find the bob in the long run. The shorter are “noisy” and “mean-reverting.” and shorter swings of the bob constitute the process of reverting to the mean. • Noisy. Calling prices “noisy” means acknowledging that they contain errors. The market overvalues A pendulum is, of course, governed by Newtonian some stocks and undervalues others. Investors who mechanics and has few irregularities. In contrast, the buy and sell stocks irrationally or erratically are process of mean reversion in financial markets is neither known as “noise traders.” deterministic nor smooth. Nonetheless, the pendulum analogy expresses key characteristics of stock price • Mean-reverting. “Mean reversion” means that stocks movements. whose prices have been trending upward or downward will, at some point, reverse direction and In the short run the most recent price movements are head back toward their average values. -
Arxiv:1705.08022V1
Using Macroeconomic Forecasts to Improve Mean Reverting Trading Strategies Yash Sharma Abstract A large class of trading strategies focus on opportunities offered by the yield curve. In partic- ular, a set of yield curve trading strategies are based on the view that the yield curve mean- reverts. Based on these strategies’ positive performance, a multiple pairs trading strategy on ma- jor currency pairs was implemented. To improve the algorithm’s performance, machine learning forecasts of a series of pertinent macroeconomic variables were factored in, by optimizing the weights of the trading signals. This resulted in a clear improvement in the APR over the evalua- tion period, demonstrating that macroeconomic indicators, not only technical indicators, should be considered in trading strategies. 1. Yield Curve The Yield Curve is a line that plots the interest rate, at a set point in time, of bonds having equal credit quality but differing maturity dates. The U.S. Treasury Yield Curve is used as a benchmark for other debt in the market, and can also be used to predict changes in economic output and growth. The shape of the yield curve gives an idea of future interest rate changes and economic activity. An inverted yield curve is often a harbinger of recession. A positively sloped yield curve is often a harbinger of inflationary growth. These predictive properties make the yield curve quite applicable in devising successful trading strategies. Many yield curve trading strategies are based on the conventional view that the yield curve mean-reverts to some historical norm. This market view is consistent with historical experience. -
2 Interest Rates & Bond 3 Global Stock Market 7 Currencies 10
Issue 228 12 June 2003 In its 20th year Fullermoney Global Strategy and Investment Trends by David Fuller www.fullermoney.com This leg of the Wall Street-led Asian stock markets now offer the rally is maturing - valuations, best opportunities in this era of slow corporate ethics and the oil price economic growth, high valuations on will re-surface as concerns. Wall Street and credit creation. Say goodbye to the Austrian school - we’re heading However near-term downside risk for a Keynesian overdose. In an ideal world, every appears limited to a summer country would start with a clean slate and be managed reaction and consolidation, followed in line with sensible, disciplined Austrian school economics. However as far as governments are concerned, we can’t get by somewhat higher levels. there from here, because Austrian economic policies would result in pain before the benefits accrued, not least because of all the debt problems. Welcome to reality. We live in a 2 Interest Rates & Bond troubled and chaotic world, in case anyone hadn’t noticed. Central banks will err on the side of easy money. Further In democracies, governments would be thrown out of office rate cuts are likely from the ECB and BoE, although the at the next election if they became born-again Austrian case for another reduction by the Fed is questionable. economists. Autocratic regimes would face uprisings. This Government bond yields have resumed their declines, is why we are heading along the path of Keynesian helped by deflation fears and liquidity, but a bubble overdose, in the form of credit creation.