Title: The predictive ability of currency futures positioning on foreign exchange spot markets
Abstract: The present thesis investigates the predictive ability of traders’ positioning in currency futures on the returns of the underlying spot market of seven Group of 10 (G10) currencies. It extends on the existing literature by utilising a more granular data source of currency futures positioning that classifies investors primarily into three categories: dealers, asset managers and leveraged funds. It also investigates the predictive ability of traders’ positioning after U.S. macroeconomic news announcements. The key finding is that the rate of change in net long currency futures positioning strongly predicts currency returns in the following week. The predictive ability, however, varies according to different investor classifications. In addition, I utilise a peak and trough model of currency futures positioning and demonstrate that the model yields strong predictive power for weekly returns. This finding provides the foundation for a trading strategy that generates a mean annualised return of 7.93% (statistically significant) per currency after transaction costs with a Sharpe ratio of 1.01. I also investigate the predictive ability of investor currency futures positioning for spot market returns following announcements of key macroeconomic indicators. The results are mixed with results for each investor classification not consistent across announcements. Nonetheless, the finding supports the notion of a unique information structure between currency derivative and underlying spot markets around macroeconomic announcements.
Publication Year: 2018
Publication Date: 2018-10-26
Language: en
Type: article
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