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A comparison of MA and RSI returns with exchange rate intervention Group Members: Zhang A comparison of MA and RSI returns with exchange rate intervention Group Members: Zhang Duo A 0075433 Tang Wai Hoh A 0075413 Fan Li A 0075376

outline • • Introduction of the paper Data & Trading Strategy Methodology & Empirical outline • • Introduction of the paper Data & Trading Strategy Methodology & Empirical Results Work in Progress & Future Exploration

Introduction of the Paper Introduction of the Paper

Introduction of the Paper • TOPIC: A comparison of MA and RSI returns with 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: Ø Two Trading Strategies: MA & RSI Ø Six Currencies: AUD/USD, CHF/USD, DEM/USD, JPY/USD, BP/USD, EUR/USD Ø Three Panels: Panel A: All observations Panel B: Remove domestic & foreign interests Panel C: Remove factor of intervention

Report Structure Trading Rules MA RSI Empirical (N=10, 20, 50, 150) Results Panel A Report Structure Trading Rules MA RSI Empirical (N=10, 20, 50, 150) Results Panel A All observations Test Model: Obs Mean t-stat p-value Sharpe(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 B Remove domestic & foreign interest Test Model: Obs Mean t-stat p-value Sharpe(1) Sharpe(2) (3) Little impact on trading rules performance Panel C Remove factor of intervention Test Model: Obs Mean t-stat p-value Sharpe(1) Sharpe(2) (4) Profitability of trading rules positively related to interventions

Data Data

DATA of the Paper FX Rate AUD/USD CHF/USD DEM/USD JPY/USD Interest Rate Intervention Data DATA of the Paper FX Rate AUD/USD CHF/USD DEM/USD JPY/USD Interest Rate Intervention Data Noon buying rates in New York time Unofficial market 11 a. m. call rates series The Reserve Bank of Australia (1983 -2002) Swiss Call money rate Swiss National Bank (1986 -1995) Daily overnight interest rate data at 0900 GMT from BIS Deutsche Bundesbank BP/USD EUR/USD Risk-free Rate Daily interest rate of 30 year US Treasury Bonds Ministry of Finance Japan(since 1991)

DATA of Our Research • Foreign Exchange Rates Ø Resource 1 : H. 10 DATA of Our Research • Foreign Exchange Rates Ø Resource 1 : H. 10 Federal Reserve Statistical Release (since 1971) http: //www. federalreserve. gov/releases/h 10/hist/default 1989. htm Ø Resource 2: Yahoo Finance (since 27 Dec 2007) http: //sg. finance. yahoo. com/q/hp? s=GBB • Interest Rates(Some) Ø Resource 3: Bloomberg (since 2001) • Intervention Data(Only One) Ø Resource 4: JPY/USD Intervention Data(Apr 1991 -Mar 2001) http: //www. mof. go. jp/english/feio/e 034_133. htm • Risk-free Rate(Done) Ø Resource 5: H. 15 Federal Reserve Statistical Release (since 1977) http: //www. federalreserve. gov/releases/h 15/data/Business_day/H 15_TCMNOM_Y 30. txt

Trading Strategy Trading Strategy

ACF s for Exchange Rate Series • Serially Correlated possible to make profits by ACF s for Exchange Rate Series • Serially Correlated possible to make profits by investigating its history Define: Regression: AUD/USD ACF(1 0. 037664 0. 016639 ) s. e. CHF/USD DEM/USD JPY/USD (A) JPY/USD (B) BP/USD EUR/USD 0. 033878 0. 019953 0. 042937 0. 016017 0. 070268 0. 022661 0. 048242 0. 022619 0. 074709 0. 015991 0. 001457 0. 025090 0. 062798 0. 022715 -0. 054601 0. 022610 ACF(2 ) s. e. ACF(3 -0. 045037 0. 016616 ) s. e. ACF(4 ) Serially Correlated!!

Trading Strategies MA RSI • Definition • Long the USD if • Short the Trading Strategies MA RSI • Definition • Long the USD if • Short the USD if Note: Pt : Exchange rate at time t, N: Number of days.

Trading Strategies RSI in General Form ----Average of N days up prices ----Average of Trading Strategies RSI in General Form ----Average of N days up prices ----Average of N days down prices RSI in the paper -SMA RSI in algoquant -EMA

Methodology & Empirical Results Methodology & Empirical Results

Methodology & Empirical Result • Mean Annual Returns & Standard Deviation • Hypothesis Testing 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 -, Mean Annual Returns • Window widths for the study are 10 -, 20 -, 50 - and 150 - days. • Daily returns: Note: rt* = foreign interest rate, rt is the domestic interest rate • Removing interest rate differentials:

Total Returns • Sum of daily returns: • Average return from time 0 to 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.

Hypothesis Testing • Let μ and σ be the mean and standard deviation of Hypothesis Testing • Let μ and σ be the mean and standard deviation of the daily returns respectively. • Sample mean: • Hypothesis H 0 : μ = 0 vs H 1: μ ≠ 0 tested using. - Efficient market with no arbitrage has a mean zero. • S = sample standard deviation

Sharpe Ratios • be the mean annual return and deviation. • Rf is the Sharpe Ratios • be the mean annual return and deviation. • Rf is the risk-free rate. be standard 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 : 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.

Trading Rules for JPY/USD & DEM/USD MA (N=10, 20, 50, 150 ) JPY/USD RSI Trading Rules for JPY/USD & DEM/USD MA (N=10, 20, 50, 150 ) JPY/USD RSI Empirical (N=10, 20, 50, 150) Results DEM/USD Panel A Test Model: Obs: Mean: Std: t-stat: P-value: Sharpe(1): Sharpe(2): MA 10 1932 12. 27% 0. 63% 3. 40 0. 00 1. 23 0. 58 Test Model: Obs: Mean: Std: t-stat: P-value: Sharpe(1): Sharpe(2): RSI 10 3882 7. 50% 0. 69% 2. 70 0. 01 0. 69 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 Test Model: Obs: Mean: Std: t-stat: P-value: Sharpe(1): Sharpe(2): MA 10 1932 12. 15% 0. 63% 3. 36 0. 00 1. 21 0. 57 Test Model: Obs: Mean: Std: t-stat: P-value: Sharpe(1): Sharpe(2): RSI 10 3882 7. 41% 0. 69% 2. 66 0. 01 0. 68 0. 17 (3) Little impact on trading rules performance Panel C Test Model: Obs: Mean: Std: t-stat: P-value: Sharpe(1): Sharpe(2): n. a n. a Test Model: Obs: Mean: Std: t-stat: P-value: Sharpe(1): Sharpe(2): RSI 10 3534 5. 45% 0. 67% 2. 12 0. 03 0. 52 -0. 01 (4) Profitability of trading rules positively related to interventions Report Structure (all obs) (remove demostic & foreign interest) (remove factor of intervention)

Work in Progress & Future Exploration 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 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 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

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 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 & 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 - SELL b) <30 – oversold - BUY

RSI with 30, 50, 70 bounds Hit 70 from below: Sell Hit 50 from RSI with 30, 50, 70 bounds Hit 70 from below: Sell Hit 50 from above: Sell Hit 50 from below: Buy Hit 30 from above: Buy

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