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Speculation and Hedging in the Currency Futures Markets: Are They Informative to the Spot Exchange Rates

This paper presents an empirical analysis investigating the relationship between the futures trading activities of speculators and hedgers and the potential movements of major spot exchange rates. A set of trader position measures are employed as regression predictors, including the level and change of net positions, an investor sentiment index, extremely bullish/bearish sentiments, and the peak/trough indicators. We find that the peaks and troughs of net positions are generally useful predictors to the evolution of spot exchange rates but other trader position measures are less correlated with future market movements. In addition, speculative position measures usually forecast price-continuations in spot rates while hedging position measures forecast price-reversals in these markets.

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File URL: http://www.umbc.edu/economics/wpapers/wp_09_116.pdf
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Paper provided by UMBC Department of Economics in its series UMBC Economics Department Working Papers with number 09-116.

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Length: 32 pages
Date of creation:
Date of revision: 01 Nov 2009
Handle: RePEc:umb:econwp:09116
Contact details of provider: Postal: UMBC Department of Economics 1000 Hilltop Circle Baltimore MD 21250, USA
Phone: 410-455-2160
Fax: 410-455-1054
Web page: http://www.umbc.edu/economics

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  1. Malcolm Baker & Jeffrey Wurgler, 2007. "Investor Sentiment in the Stock Market," NBER Working Papers 13189, National Bureau of Economic Research, Inc.
  2. 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.
  3. Martin D. D. Evans(Georgetown University and NBER) and Richard K. Lyons(U.C. Berkeley and NBER, Haas School of Business), 2005. "Meese-Rogoff Redux: Micro-Based Exchange Rate Forecasting," Working Papers gueconwpa~05-05-01, Georgetown University, Department of Economics.
  4. Martin D.D. Evans & Richard K. Lyons, 1999. "Order Flow and Exchange Rate Dynamics," NBER Working Papers 7317, National Bureau of Economic Research, Inc.
  5. Hartzmark, Michael L, 1991. "Luck versus Forecast Ability: Determinants of Trader Performance in Futures Markets," The Journal of Business, University of Chicago Press, vol. 64(1), pages 49-74, January.
  6. Malcolm Baker & Jeffrey Wurgler, 2004. "Investor Sentiment and the Cross-Section of Stock Returns," NBER Working Papers 10449, National Bureau of Economic Research, Inc.
  7. Martin D. D. Evans (Georgetown University), 2005. "Understanding Order Flow," Working Papers gueconwpa~05-05-19, Georgetown University, Department of Economics.
  8. Giorgio Valente & Lucio Sarno & Abhay Abhayankar, 2004. "Exchange Rates and Fundamentals: Evidence on the Economic Value of Predictability," Working Papers wp04-01, Warwick Business School, Finance Group.
  9. Wang, Changyun, 2001. "The behavior and performance of major types of futures traders," MPRA Paper 36426, University Library of Munich, Germany, revised Jul 2002.
  10. Frans A. de Roon & Theo E. Nijman & Chris Veld, 2000. "Hedging Pressure Effects in Futures Markets," Journal of Finance, American Finance Association, vol. 55(3), pages 1437-1456, 06.
  11. Frankel, Jeffrey A. & Rose, Andrew K., 1995. "Empirical research on nominal exchange rates," Handbook of International Economics, in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 33, pages 1689-1729 Elsevier.
  12. Wang, Changyun, 2000. "Investor sentiment and return predictability in agricultural futures markets," MPRA Paper 36425, University Library of Munich, Germany, revised Sep 2002.
  13. 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.
  14. Meese, Richard A. & Rogoff, Kenneth, 1983. "Empirical exchange rate models of the seventies : Do they fit out of sample?," Journal of International Economics, Elsevier, vol. 14(1-2), pages 3-24, February.
  15. Bessembinder, Hendrik, 1992. "Systematic Risk, Hedging Pressure, and Risk Premiums in Futures Markets," Review of Financial Studies, Society for Financial Studies, vol. 5(4), pages 637-67.
  16. Payne, Richard, 2003. "Informed trade in spot foreign exchange markets: an empirical investigation," Journal of International Economics, Elsevier, vol. 61(2), pages 307-329, December.
  17. Alok Kumar & Charles M.C. Lee, 2006. "Retail Investor Sentiment and Return Comovements," Journal of Finance, American Finance Association, vol. 61(5), pages 2451-2486, October.
  18. Jonathan Kearns & Phil Manners, 2004. "The Profitability of Speculators in Currency Futures Markets," RBA Research Discussion Papers rdp2004-07, Reserve Bank of Australia.
  19. Leuthold, Raymond M & Garcia, Philip & Lu, Richard, 1994. "The Returns and Forecasting Ability of Large Traders in the Frozen Pork Bellies Futures Market," The Journal of Business, University of Chicago Press, vol. 67(3), pages 459-73, July.
  20. Killeen, William P. & Lyons, Richard K. & Moore, Michael J., 2006. "Fixed versus flexible: Lessons from EMS order flow," Journal of International Money and Finance, Elsevier, vol. 25(4), pages 551-579, June.
  21. Wang, Changyun, 2004. "Futures trading activity and predictable foreign exchange market movements," Journal of Banking & Finance, Elsevier, vol. 28(5), pages 1023-1041, May.
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