Transcript forex trading opportunities through prices under climate

by
Jack Penm and R.D. Terrell
College of Business and Economics
The Australian National University
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Can currency short selling decisions diversify a currency
investment portfolio?
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Can an investor buy one short-term bullish currency, and short sell
another short-term bearish currency?
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Can an investor buy one short-term bearish currency, and short
sell another short-term bullish currency?
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Can Granger causal relations exist between an exchange rate
and a price index?
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Can Granger causal relations be valuable in capturing forex
trading opportunities?
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Are error-correction technologies suitable for identifying causal links
between prices and exchange rates?
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Is VECM suitable for identifying cointegrating vectors?
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Is the forgetting factor technique a data weighting process?
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Does subset time series modelling include full-order models?
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Can climate change modelling portray the potential hazards for small
developing states such as Taiwan?
OUTLINE
Research has been conducted in short selling decisions where
consumer prices involve both currency trades and weather
shocks, using new sparse patterned forgetting factor inclusive
time-series approaches. Our results indicate that, in order to
maximise forex trading opportunities and diversify a currency
investment portfolio, an investor might choose to buy one shortterm bullish currency, and short sell another short-term bearish
currency.
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Subset autoregressive (AR) modelling includes full-order AR
models, and researchers use this approach whenever
measurements exhibit some periodicity.
If the underlying true AR process has a subset structure, the
suboptimal full-order specification can give rise to inefficient
estimates and inferior projections.
The forgetting factor is a data weighting process that gives more
weight to recent observations and less weight to earlier data.
The forgetting factor has been widely used to capture
nonstationarity and improve forecasting performance.
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In vector time-series analysis, VECMs have become an important
means of detecting Granger causal relations and cointegrating
relations.
Commonly employed full-order VECM models assume nonzero
entries in all their coefficient matrices.
However, applications of VECM models to economic and financial
time-series data have revealed that zero entries are indeed
possible.
This VECM, with allowance for possible zero entries in the
coefficient matrices, is referred to as a sparse patterned VECM.
Sparse patterned VECM models include full-order models.
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existence of zero entries has not been fully explored in
causality and cointegration theory.
Specifically, if indirect causality or Granger non-causality exists
among the variables, the use of ‘overparameterised’ full-order VECM
models may weaken the power of statistical inferences.
We argue that the sparse patterned VECM is a more
straightforward and effective means of testing for both indirect
causality and Granger non-causality.
The same benefits will be present if the sparse patterned VECM is
used to analyse cointegrating relations
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Identical Granger causality, Granger non-causality and indirect
causality relations among the variables can be detected by
sparse patterned VAR models or by equivalent VECM models.
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Granger non-causality and/or indirect causality in the framework
of a sparse patterned VECM, are more likely to be correctly
defined by finding zero coefficient entries where the underlying
process does indeed include such zero entries.
Summary
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At the end of January 2001, a US dollar was valued at 32.63
Taiwanese dollars, and a Euro was valued at 30.61 Taiwanese
dollars.
An investor who borrowed a million US dollars to exchange
Taiwanese dollars, received 32.63 million Taiwanese dollars, and
then exchanged those Taiwanese dollars to receive 1.066 million
Euros.
At the end of January 2010, a Euro was
valued at 45.50 Taiwanese dollars, and a US
dollar was valued at 31.87 Taiwanese dollars.
This investor sold the 1.066 million Euros in
exchange for Taiwanese dollars, received
48.503 million Taiwanese dollars, and then
exchanged those Taiwanese dollars to
receive 1.5219 million US dollars. After
returning the borrowed one million US
dollars, this investor gained 0.5219 million
US dollars
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The paper presents the causal links between
exchange rates and macroeconomic price
indices, in complex forex short selling
environments.
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This approach can be used to guide further
appropriate use of data in changing currency
trade environments.
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As the development course of climate change
is a long-term slowly evolving underlying
process in VECM modelling, the effects of
climate change on currency trade are portrayed