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Limits to Arbitrage and Technical Analysis Returns in the Foreign Exchange Market
Stockholms universitet, Samhällsvetenskapliga fakulteten, Företagsekonomiska institutionen.ORCID-id: 0000-0002-1014-9592
(engelsk)Manuskript (preprint) (Annet vitenskapelig)
Abstract [en]

The profitability of technical analysis strategies seriously challenges weak-form market efficiency. An important, unanswered question is why these profit opportunities are not arbitraged away by rational investors. This study tests whether arbitrage risk in the form of limits to arbitrage (LTA) and investor sentiment explain the returns to technical analysis strategies. I find that seven proxies for LTA are positively related to returns to[AH1]  technical analysis portfolios, based on a large set of technical trading rules for six major currencies. However, higher levels of investor sentiment are unrelated to higher returns to technical analysis, contrasting the literature on stock market anomalies and practitioner belief. The main takeaway is that LTA are an important determinant of technical analysis profitability.

Emneord [en]
foreign exchange, technical analysis, limits to arbitrage, false discovery rate
HSV kategori
Forskningsprogram
företagsekonomi
Identifikatorer
URN: urn:nbn:se:su:diva-169589OAI: oai:DiVA.org:su-169589DiVA, id: diva2:1322697
Tilgjengelig fra: 2019-06-11 Laget: 2019-06-11 Sist oppdatert: 2019-06-17bibliografisk kontrollert
Inngår i avhandling
1. Essays on Investor Behavior and Trading Strategies in International Financial Markets
Åpne denne publikasjonen i ny fane eller vindu >>Essays on Investor Behavior and Trading Strategies in International Financial Markets
2019 (engelsk)Doktoravhandling, med artikler (Annet vitenskapelig)
Abstract [en]

This dissertation contains four articles that in different ways inform on investor behavior in international financial markets, their impact on the underlying market, and the trading strategies that they pursue.

Article I studies how hedge funds herd in currency future contracts and how it is affecting the underlying market. The results indicate that hedge funds herd, and that they herd in a pattern that is consistent with them following the carry trade strategy. Hedge fund herding has an impact on the underlying market, in the direction of the herd, and the results give no indication that their herding in destabilizing.

Article II examines if limits to arbitrage can help explain the returns to technical analysis strategies in the foreign exchange market. The findings show that returns to technical analysis strategies are higher when limits to arbitrage are more severe, supporting the argument that profit opportunities can persist as arbitrage activity is costly and risky. However, investor sentiment seem to be unrelated to technical analysis returns. The main takeaway is that limits to arbitrage are an important determinant of technical analysis profitability.

Article III investigates whether the trading activity of speculators is beneficial for the speed of information diffusion in the foreign exchange market. The findings show that predictive ability of the equity market on foreign exchange strategies dissipates when speculator activity is high. However, the same results are not found for the commodity markets ability to predict foreign exchange strategies. Overall, the results indicate that speculators play a vital role for informational efficiency in the foreign exchange market.

Article IV examines the impact of investor attention on stock and foreign exchange market volatility in emerging economies using a newly constructed innovative attention proxies that capture the full spectrum of the dynamics of the information processing stages. The results show that investor attention significantly effects emerging stock market volatility, but not FX market volatility.

sted, utgiver, år, opplag, sider
Stockholm: Stockholm Business School, Stockholm University, 2019. s. 14
Emneord
foreign exchange, speculators, hedge funds, investor behavior, trading strategies, information, market efficiency
HSV kategori
Forskningsprogram
företagsekonomi
Identifikatorer
urn:nbn:se:su:diva-169603 (URN)978-91-7797-723-0 (ISBN)978-91-7797-724-7 (ISBN)
Disputas
2019-09-10, Gröjersalen, hus 3, Kräftriket, Roslagsvägen 101, Stockholm, 13:00 (engelsk)
Opponent
Veileder
Merknad

At the time of the doctoral defense, the following papers were unpublished and had a status as follows: Paper 1: Manuscript. Paper 2: Manuscript. Paper 3: Manuscript.

Tilgjengelig fra: 2019-08-16 Laget: 2019-06-17 Sist oppdatert: 2019-08-13bibliografisk kontrollert

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