A comparison of
MA and RSI returns
with exchange rate intervention
Group Members:
Zhang Duo A0075433
Tang Wai Hoh A0075413
Fan Li A0075376
outline
•
•
•
•
Introduction of the paper
Data & Trading Strategy
Methodology & Empirical Results
Work in Progress & Future Exploration
Introduction of the Paper
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 Rules
MA
RSI
Empirical
(N=10,20,50,150) (N=10,20,50,150) 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
AUD/USD
CHF/USD
DEM/USD
JPY/USD
FX Rate
Interest Rate
Intervention Data
Noon
buying
rates in
New York
time
Unofficial market 11 a.m.
call rates series
The Reserve Bank
of Australia
(1983-2002)
Swiss Call money rate
Swiss National
Bank
(1986-1995)
Daily overnight interest
rate data at 0900GMT
from BIS
Deutsche
Bundesbank
BP/USD
EUR/USD
Risk-free Rate
Daily interest rate of 30year US Treasury Bonds
Ministry of
Finance
Japan(since 1991)
DATA of Our Research
• Foreign Exchange Rates
 Resource 1 : H.10 Federal Reserve Statistical Release (since 1971)
http://www.federalreserve.gov/releases/h10/hist/default1989.htm
 Resource 2: Yahoo Finance (since 27 Dec 2007)
http://sg.finance.yahoo.com/q/hp?s=GBB
• Interest Rates(Some)
 Resource 3: Bloomberg (since 2001)
• Intervention Data(Only One)
 Resource 4: JPY/USD Intervention Data(Apr 1991-Mar 2001)
http://www.mof.go.jp/english/feio/e034_133.htm
• Risk-free Rate(Done)
 Resource 5: H.15 Federal Reserve Statistical Release (since 1977)
http://www.federalreserve.gov/releases/h15/data/Business_day/H15_TCMNOM_Y30.txt
Trading Strategy
ACF s for Exchange Rate Series
• Serially Correlated
Define: yt  ln et  ln et 1
Regression: yt   k yt  k
AUD/USD
ACF(1) 0.037664
0.016639
s.e.
possible to make profits by
investigating its history
 t
CHF/USD
DEM/USD
JPY/USD
(A)
JPY/USD
(B)
BP/USD
EUR/USD
0.033878
0.019953
0.042937
0.016017
0.070268
0.022661
0.048242
0.022619
0.074709
0.015991
0.001457
0.025090
0.062798
0.022715
-0.054601
0.022610
ACF(2)
s.e.
ACF(3) -0.045037
0.016616
s.e.
ACF(4)
s.e.
ACF(5)
s.e.
Serially Correlated!!
Trading Strategies
MA
RSI
• Definition
1
MA( N )t 
N
• Long the USD if
• Short the USD if
Note:
P
i 0
t i
• Long the USD if
RSI ( N )t  50
Pt  MA( N )t
Pt  MA( N )t
N 1
• Definition
N 1
( Pt i  Pt i 1 ) I {Pt i  Pt i 1}

i 0
RSI ( N )t 
 100
N 1
i0 | Pt i  Pt i1 |
• Short the USD if
RSI ( N )t  50
Pt : Exchange rate at time t, N: Number of days.
Trading Strategies
RSI in General Form
RSI ( N )t  100 
RS 
Average(U , t )
Average( D, t )
----Average of N days up prices
----Average of N days down prices
RSI in the paper
-SMA
RSI in algoquant
-EMA
SMA(U , n)
RS 
SMA( D, n)
1
SMA( N )t 
N
100
RS

 100
1  RS 1  RS
EMA(U , n)
RS 
EMA( D, n)
N 1
P
i 0
t i
EMA( N )t    Pt  (1   )  EMA( N )t 1
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:
 t   t ln Pt 1  ln Pt  ln 1  rt*   ln 1  rt 
 1
t  
 1
for buy signal
for sell signal
Note: rt* = foreign interest rate, rt is the domestic interest rate
• Removing interest rate differentials:
 t   t ln Pt 1  ln Pt 
Total Returns
• Sum of daily returns:
T 1
  t
i 0
• Average return from time 0 to T:

 
T

T 1
i 0
t
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:
 ~ N  ,  2 T 
• Hypothesis H0 : μ = 0 vs H1: μ ≠ 0 tested using.
- Efficient market with no arbitrage has a mean zero.
t

S/ T
• S = sample standard deviation
Sharpe Ratios
•  be the mean annual return and S be standard
deviation.
• Rf is the risk-free rate.

Sharpe 1 
S
Sharpe 2 
  Rf
S
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. : number of observations.
• Mean : mean annual return in percentage.
• Std (daily returns) : standard deviation of the daily returns.
• t-stat : t-statistic value.
• P-value : tail probability generated by the observed test
statistic under the null hypothesis.
Trading Rules
for JPY/USD &
DEM/USD
Panel A
MA
RSI
Empirical
(N=10,20,50,150) (N=10,20,50,150) Results
JPY/USD
DEM/USD
Report
Structure
Test Model:
MA10
Test Model: RSI 10
(all obs)
Obs:
Mean:
Std:
t-stat:
P-value:
Sharpe(1):
Sharpe(2):
Panel B
Panel C
(remove demostic
& foreign interest)
(remove factor of
intervention)
1932
12.27%
0.63%
3.40
0.00
1.23
0.58
(1) RSI&MA: positive risk
adjusted returns on
JPY/USD & DEM/USD
(2) RSI>MA for DEM/USD;
MA>RSI for JPY/USD
Obs:
Mean:
Std:
t-stat:
P-value:
Sharpe(1):
Sharpe(2):
3882
7.50%
0.69%
2.70
0.01
0.69
0.17
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:
Obs:
Mean:
Std:
t-stat:
P-value:
Sharpe(1):
Sharpe(2):
RSI 10
3882
7.41%
0.69%
2.66
0.01
0.68
0.17
(3) Little impact on
trading rules performance
Test Model:
Obs:
Mean:
Std:
t-stat:
P-value:
Sharpe(1):
Sharpe(2):
Test Model:
Obs:
Mean:
Std:
t-stat:
P-value:
Sharpe(1):
Sharpe(2):
RSI 10
3534
5.45%
0.67%
2.12
0.03
0.52
-0.01
(4) Profitability of trading
rules positively related to
interventions
n.a
n.a
n.a
n.a
n.a
n.a
n.a
n.a
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 70 from below:
Sell
Hit 50 from above:
Sell
Hit 50 from below:
Buy
Hit 30 from above:
Buy
Q&A
Thank You!