By Sergei Belov, Ernest Chan, Nahid Jetha, and Akshay Nautiyal ABSTRACT We applied Corrective AI (Chan, 2022) to a trading model that takes advantage of the intraday seasonality of forex returns. Breedon and Ranaldo (2012) observed that foreign currencies depreciate vs. the US dollar during their local working hours and appreciate during the local working hours of the US dollar. We first backtested the results of Breedon and Ranaldo on recent EURUSD data from September 2021 to January 2023 and then applied Corrective AI to this trading strategy to achieve a significant increase in performance. Breedon and Ranaldo (2012) described a trading strategy that shorted EURUSD during European working hours (3 AM ET to 9 AM ET, where ET denotes the local time in New York, accounting for daylight savings) and bought EURUSD during US working hours (11 AM ET to 3 PM ET). The rationale is that large-scale institutional buying of the US dollar takes place during European working hours to pa
Equity investors like to check out a company's price/earnings ratio before they invest in its stock. Likewise, real estate investors should do the same before buying a house. The equivalent of price/earnings ratio for real estate is the price/rent ratio, or inversely, the rent/price yield.
What is a reasonable rent/price yield for US residential real estate? According to Morris Davis of the University of Wisconsin-Madison, and Andreas Lehnert and Robert Martin of the Fed, the long-term average is 5% (i.e. the annual rent of a house should be about 5% of its market value). As the Economist magazine has reported, at the height of the US housing boom, this figure dropped to as low as 3.5%.
Currently, this ratio is at about 4.3%, which implies that average US housing price has to drop another 14% in order to return to its historical fair value.
Can quantitative traders profit from this prediction? Well, we can always short the S&P/Case-Shiller Home Price Indices futures at the Chicago Mercantile Exchange.
What is a reasonable rent/price yield for US residential real estate? According to Morris Davis of the University of Wisconsin-Madison, and Andreas Lehnert and Robert Martin of the Fed, the long-term average is 5% (i.e. the annual rent of a house should be about 5% of its market value). As the Economist magazine has reported, at the height of the US housing boom, this figure dropped to as low as 3.5%.
Currently, this ratio is at about 4.3%, which implies that average US housing price has to drop another 14% in order to return to its historical fair value.
Can quantitative traders profit from this prediction? Well, we can always short the S&P/Case-Shiller Home Price Indices futures at the Chicago Mercantile Exchange.
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