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Menampilkan postingan dari Oktober, 2008

Applying Corrective AI to Daily Seasonal Forex Trading

  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

Some riskless profit, and why it exists

Numerous commentators have pointed out the enormous yield spread between agencies debt (Fannie /Freddie) and US Treasuries. Here are some links kindly provided by a reader: 10 yr Fannie/Treasury , 5 yr Fannie/Treasury , 10 yr Freddie/Treasury , and 5 yr Freddie/Treasury . Currently their spreads are above 150 bp. Since the US government has nationalized Fannie and Freddie, this 150 bp is a riskless profit. As the blog Accrued Interest has pointed out, one reason this riskless profit exists is hedge fund deleveraging: nobody has the risk appetite to arbitrage this spread at a meaningful scale. Brad Setser , a blogger at the Council of Foreign Relations, suggests that the Chinese government, who does have a lot of cash to benefit from this high yield, should go ahead and buy up these agencies debt. However, if you read the Chinese blogs and online comments, there is enormous internal pressure for the government to spend some of this money on infrastructure projects, social security, he

How does the financial crisis affect quantitative trading?

Now that we are reasonably sure the financial world is not coming to an end yet, it is reasonable to ask how quantitative strategies have been faring under this extreme market stress. Despite reports of massive hedge fund deleveraging and negative YTD returns, I believe quantitative strategies, especially statistical arbitrage, have survived the period relatively unscathed. But here are a few of my thoughts: 1) The paltry 10% annual returns that a mediocre statarb fund can deliver is suddenly looking pretty good when the risk-free rate is under 1% and a prolonged bear market is on the horizon. 2) Mean-reversal models continue to beat momentum models in this crisis environment, as in previous crisis environments. This is not surprising because market returns have completely dominated specific returns, and of course market returns have been highly mean-reverting lately. 3) Models involving shorts are under some tumoil because of regime-change induced by new and ever-changing short-sale r