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
In my book I devoted considerable attention to the phenomenon of "Momentum Crashes" that professor Kent Daniel discovered. This refers to the fact that momentum strategies generally work very poorly in the immediate aftermath of a financial crisis. This phenomenon apparently spans many asset classes, and has been around since the Great Depression. Sometimes it lasted multiple decades, and at other times these strategies recovered during the lifetime of a momentum trader. So how have momentum strategies fared after the 2008 financial crisis, and have they recovered?
First, let's look at the Diversified Trends Indicator (formerly the S&P DTI index), which is a fairly generic trend-following strategy applied to futures. Here are the index values since inception (click to enlarge):
and here are the values for 2013:
After suffering relentless decline since 2009, it has finally shown positive returns YTD!
Now look at a momentum strategy on the soybean futures (ZS) that I have been working on. Here are the cumulative returns from 2009 to 2011 June:
and here the cumulative returns since then:
The difference is stark!
Despite evidences that indeed momentum strategies have enjoyed a general recovery, we must play the part of skeptical financial scientists and look for alternative theories. If any reader can tell us an alternative, plausible explanation why ZS should start to display trending behavior since July 2011, but not before, please post that in the comment area. The prize for the best explanation: I will disclose in private more details about this strategy to that reader. (To claim the prize, please include the last 4 digit of your phone number in the post for identification purpose.)
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Upcoming events:
I will be teaching an online workshop on Momentum Strategies from July 30 - August 1. Registration info can be found here.
My friend Dr. Haksun Li is offering a Certificate in Quantitative Investment series of courses.
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