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Speculator activity and the cross-asset predictability of FX returns
Stockholm University, Faculty of Social Sciences, Stockholm Business School.ORCID iD: 0000-0002-1014-9592
Stockholm University, Faculty of Social Sciences, Stockholm Business School.ORCID iD: 0000-0003-3378-7543
(English)Manuscript (preprint) (Other academic)
Abstract [en]

This paper applies the gradual information diffusion hypothesis, which suggests that information spreads gradually across asset markets, leading to cross-asset return predictability, to explain the role of speculator activity in the cross-asset return predictability of foreign exchange (FX) market strategies. We argue that the activity of speculators should increase the rate of information diffusion across asset markets. Hence, we expect the predictability from of the equity and commodity markets to predict the FX market would to be weaker when speculators are active in the FX market. Our results show that, when speculator activity is high, predictability from the equity market’s ability  to predict the FX market dissipates, but not to the same extent as for the commodity market. Our findings suggest that speculators play a vital role in enhancing informational efficiency in the FX market.

Keywords [en]
speculation, carry trade, momentum, fundamental, predictability, information
National Category
Business Administration
Research subject
Business Administration
Identifiers
URN: urn:nbn:se:su:diva-169593OAI: oai:DiVA.org:su-169593DiVA, id: diva2:1322710
Available from: 2019-06-11 Created: 2019-06-11 Last updated: 2019-06-17Bibliographically approved
In thesis
1. Essays on Investor Behavior and Trading Strategies in International Financial Markets
Open this publication in new window or tab >>Essays on Investor Behavior and Trading Strategies in International Financial Markets
2019 (English)Doctoral thesis, comprehensive summary (Other academic)
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.

Place, publisher, year, edition, pages
Stockholm: Stockholm Business School, Stockholm University, 2019. p. 14
Keywords
foreign exchange, speculators, hedge funds, investor behavior, trading strategies, information, market efficiency
National Category
Business Administration
Research subject
Business Administration
Identifiers
urn:nbn:se:su:diva-169603 (URN)978-91-7797-723-0 (ISBN)978-91-7797-724-7 (ISBN)
Public defence
2019-09-10, Gröjersalen, hus 3, Kräftriket, Roslagsvägen 101, Stockholm, 13:00 (English)
Opponent
Supervisors
Note

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.

Available from: 2019-08-16 Created: 2019-06-17 Last updated: 2019-08-13Bibliographically approved

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