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Searching for Inefficiencies in Exchange Rate Dynamics

Author

Listed:
  • Guglielmo Maria Caporale

    (Brunel University London)

  • Luis Gil-Alana

    (University of Navarra)

  • Alex Plastun

    (Sumy State University)

Abstract

This paper develops a new pair trading method to detect inefficiencies in exchange rates movements and arbitrage opportunities using a convergence/divergence indicator (CDI) belonging to the oscillatory class. The proposed technique is applied to 11 exchange rates over the period 2010–2015, and trading rules based on CDI signals are obtained. The CDI indicator is shown to outperform others of the oscillatory class and in some cases (for EURAUD and AUDJPY) to generate profits. The suggested approach is of general interest and can be applied to different financial markets and assets.

Suggested Citation

  • Guglielmo Maria Caporale & Luis Gil-Alana & Alex Plastun, 2017. "Searching for Inefficiencies in Exchange Rate Dynamics," Computational Economics, Springer;Society for Computational Economics, vol. 49(3), pages 405-432, March.
    • Handle: RePEc:kap:compec:v:49:y:2017:i:3:d:10.1007_s10614-016-9567-2
    DOI: 10.1007/s10614-016-9567-2
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    References listed on IDEAS

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    Cited by:

    1. Zhaoyi Xu & Yuqing Zeng & Yangrong Xue & Shenggang Yang, 2022. "Early Warning of Chinese Yuan’s Exchange Rate Fluctuation and Value at Risk Measure Using Neural Network Joint Optimization Algorithm," Computational Economics, Springer;Society for Computational Economics, vol. 60(4), pages 1293-1315, December.
    2. D. Th. Vezeris & C. J. Schinas & G. Papaschinopoulos, 2018. "Profitability Edge by Dynamic Back Testing Optimal Period Selection for Technical Parameters Optimization, in Trading Systems with Forecasting," Computational Economics, Springer;Society for Computational Economics, vol. 51(4), pages 761-807, April.

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    More about this item

    Keywords

    Pair trading; Oscillator; Trading strategy; Convergence/divergence indicator (CDI); Exchange rates;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques

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