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

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

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:  Two Trading Strategies: MA & RSI  Six Currencies: AUD/USD, CHF/USD, DEM/USD, JPY/USD, BP/USD, EUR/USD  Three Panels: Panel A: All observations Panel B: Remove domestic & foreign interests Panel C: Remove factor of intervention

Report Structure Trading RulesMA (N=10,20,50,150) RSI (N=10,20,50,150) Empirical Results Panel A All observations Test Model: Obs Mean t-stat p-value Sharpe(1) Sharpe(2) 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) 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) Test Model: Obs Mean t-stat p-value Sharpe(1) Sharpe(2) (4) Profitability of trading rules positively related to interventions

Data

DATA of the Paper FX RateInterest RateIntervention Data AUD/USDNoon buying rates in New York time Unofficial market 11 a.m. call rates series The Reserve Bank of Australia ( ) CHF/USD Swiss Call money rateSwiss National Bank ( ) DEM/USDDaily overnight interest rate data at 0900GMT from BIS Deutsche Bundesbank JPY/USDMinistry of Finance Japan(since 1991) BP/USD EUR/USD Risk-free RateDaily interest rate of 30- year US Treasury Bonds

DATA of Our Research Foreign Exchange Rates  Resource 1 : H.10 Federal Reserve Statistical Release (since 1971)  Resource 2: Yahoo Finance (since 27 Dec 2007) Interest Rates(Some)  Resource 3: Bloomberg (since 2001) Intervention Data(Only One)  Resource 4: JPY/USD Intervention Data(Apr 1991-Mar 2001) Risk-free Rate(Done)  Resource 5: H.15 Federal Reserve Statistical Release (since 1977)

Trading Strategy

ACF s for Exchange Rate Series Serially Correlated possible to make profits by investigating its history AUD/USDCHF/USDDEM/USDJPY/USD (A) JPY/USD (B) BP/USDEUR/USD ACF(1) s.e ACF(2) s.e. ACF(3) s.e ACF(4) s.e. ACF(5) s.e. Serially Correlated!! Define: Regression:

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

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

Methodology & Empirical Results

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-, 50- and 150- days. Daily returns: Removing interest rate differentials: Note: r t * = foreign interest rate, r t is the domestic interest rate

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 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 be standard deviation. R f is the risk-free rate. 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. : n umber of observations. Mean : mean annual return in percentage. Std (daily returns) : s tandard deviation of the daily returns. t-stat : t -statistic value. P-value : tail probability generated by the observed test statistic under the null hypothesis.

Logic of Methodology and - Sharpe ratios - Daily Returns Starting Date - Ending Date Trading Strategy Mean Annual Returns Std. of Daily Returns t-stat & P-value

Report Structure Trading Rules for JPY/USD & DEM/USD MA (N=10,20,50,150) JPY/USD RSI (N=10,20,50,150) DEM/USD Empirical Results Panel A (all obs) Test Model: MA10 Obs: 1932 Mean: 12.27% Std: 0.63% t-stat: 3.40 P-value: 0.00 Sharpe(1): 1.23 Sharpe(2): 0.58 Test Model: RSI 10 Obs: 3882 Mean: 7.50% Std: 0.69% t-stat: 2.70 P-value: 0.01 Sharpe(1): 0.69 Sharpe(2): 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 (remove demostic & foreign interest ) Test Model: MA10 Obs: 1932 Mean: 12.15% Std: 0.63% t-stat: 3.36 P-value: 0.00 Sharpe(1): 1.21 Sharpe(2): 0.57 Test Model: RSI 10 Obs: 3882 Mean: 7.41% Std: 0.69% t-stat: 2.66 P-value: 0.01 Sharpe(1): 0.68 Sharpe(2): 0.17 (3) Little impact on trading rules performance Panel C (remove factor of intervention) Test Model: n.a Obs: n.a Mean: n.a Std: n.a t-stat: n.a P-value: n.a Sharpe(1): n.a Sharpe(2): n.a Test Model: RSI 10 Obs: 3534 Mean: 5.45% Std: 0.67% t-stat: 2.12 P-value: 0.03 Sharpe(1): 0.52 Sharpe(2): (4) Profitability of trading rules positively related to interventions

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 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

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 & 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 30 from above: Buy Hit 30 from above: Buy Hit 70 from below: Sell Hit 70 from below: Sell Hit 50 from above: Sell Hit 50 from above: Sell Hit 50 from below: Buy Hit 50 from below: Buy

Hit 30 from below: Buy Hit 30 from below: Buy Hit 70 from above: Sell Hit 70 from above: Sell Hit 50 from above: Sell Hit 50 from above: Sell Hit 50 from below: Buy Hit 50 from below: Buy

Q & A Thank You!

SOURCE COPY 1 COPY 2 TRADING STRATEGIES DATES OF BUY / SELL RESULT ANALYSIS Further implementations in JAVA