Speculation in the Foreign Exchange Markets Using Intertemperal Empirical Models

Open Access
Prichard, Stephen Chadwick
Area of Honors:
Bachelor of Science
Document Type:
Thesis Supervisors:
  • Stephen Ross Yeaple, Thesis Supervisor
  • David Shapiro, Honors Advisor
  • Speculation
  • Foreign Exchange
  • Technical Analysis
Due to recent asset bubbles, behavioral economics has gained popularity among some economists to explain market phenomena where traditional economics breaks down. Behavioral economics predicts that market inefficiencies due to irrational behavior in the short run creates speculative opportunities in order to return assets to fundamental levels in the long run. Using two intertemporal empirical models, moving average convergence divergence (MACD) and relative strength index (RSI), in the foreign exchange markets, EUR/USD, GBP/USD, USD/CHF, and USD/JPY, over three time periods, 5 minute, hourly, and daily, the models are fitted to 2000-2009 data and applied to 2010-2012 data to test the models’ robustness. It is found that six combinations achieve excess returns of 5% or more while having essentially a zero probability of randomly occurring. Also, it is shown that asset returns are partially dependent upon previous returns as predicted by the non-random walk theory.