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The Profitability of Speculators in Currency Futures Markets

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  • Jonathan Kearns

    (Reserve Bank of Australia)

  • Phil Manners

    (Reserve Bank of Australia)

Abstract

Using weekly data on the positions of different types of participants in currency futures markets we present evidence that suggests speculators are profitable. Across six currencies, speculators’ gross profits are seemingly positive in 60 per cent of weeks. The profits are significant even after accounting for transactions costs. Our estimated speculator profits are consistent both with speculators being paid a risk premium and with speculators having superior forecasting ability.

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Bibliographic Info

Paper provided by Reserve Bank of Australia in its series RBA Research Discussion Papers with number rdp2004-07.

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Date of creation: Sep 2004
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Handle: RePEc:rba:rbardp:rdp2004-07

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Keywords: exchange rates; futures markets; speculators;

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References

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  1. Lui, Yu-Hon & Mole, David, 1998. "The use of fundamental and technical analyses by foreign exchange dealers: Hong Kong evidence," Journal of International Money and Finance, Elsevier, vol. 17(3), pages 535-545, June.
  2. Taylor, Mark P. & Allen, Helen, 1992. "The use of technical analysis in the foreign exchange market," Journal of International Money and Finance, Elsevier, vol. 11(3), pages 304-314, June.
  3. Goodman, Stephen H, 1979. "Foreign Exchange Rate Forecasting Techniques: Implications for Business and Policy," Journal of Finance, American Finance Association, vol. 34(2), pages 415-27, May.
  4. Neely, Christopher & Weller, Paul & Dittmar, Rob, 1997. "Is Technical Analysis in the Foreign Exchange Market Profitable? A Genetic Programming Approach," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 32(04), pages 405-426, December.
  5. Thomas Klitgaard & Laura Weir, 2004. "Exchange rate changes and net positions of speculators in the futures market," Economic Policy Review, Federal Reserve Bank of New York, issue May, pages 17-28.
  6. Bessembinder, Hendrik & Chan, Kalok, 1992. "Time-varying risk premia and forecastable returns in futures markets," Journal of Financial Economics, Elsevier, vol. 32(2), pages 169-193, October.
  7. Cheung, Yin-Wong & Wong, Clement Yuk-Pang, 2000. "A survey of market practitioners' views on exchange rate dynamics," Journal of International Economics, Elsevier, vol. 51(2), pages 401-419, August.
  8. Menkhoff, L., 1998. "The noise trading approach -- questionnaire evidence from foreign exchange," Journal of International Money and Finance, Elsevier, vol. 17(3), pages 547-564, June.
  9. Taylor, Stephen J, 1992. "Rewards Available to Currency Futures Speculators: Compensation for Risk or Evidence of Inefficient Pricing?," The Economic Record, The Economic Society of Australia, vol. 0(0), pages 105-16, Supplemen.
  10. Sweeney, Richard J, 1986. " Beating the Foreign Exchange Market," Journal of Finance, American Finance Association, vol. 41(1), pages 163-82, March.
  11. Andrews, Donald W K, 1993. "Exactly Median-Unbiased Estimation of First Order Autoregressive/Unit Root Models," Econometrica, Econometric Society, vol. 61(1), pages 139-65, January.
  12. Wang, Changyun, 2004. "Futures trading activity and predictable foreign exchange market movements," Journal of Banking & Finance, Elsevier, vol. 28(5), pages 1023-1041, May.
  13. Hartzmark, Michael L, 1987. "Returns to Individual Traders of Futures: Aggregate Results," Journal of Political Economy, University of Chicago Press, vol. 95(6), pages 1292-1306, December.
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Cited by:
  1. Michael J. Sager & Mark P. Taylor, 2006. "Under the microscope: the structure of the foreign exchange market," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 11(1), pages 81-95.
  2. Aaron Tornell & Chunming Yuan, . "Speculation and Hedging in the Currency Futures Markets: Are They Informative to the Spot Exchange Rates," UMBC Economics Department Working Papers 09-116, UMBC Department of Economics, revised 01 Nov 2009.

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