Are key market players in currency derivatives markets affected by financial conditions?
Date
2018
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LLC CPC Business Perspectives
Abstract
Tis study investigates if the biggest players in major foreign currencies futures markets are affected by current and previous fnancial conditions. Using root mean squared errors (RMSE), normalized RMSE, and Nash-Sutcliffe efciency, this study compares the impact of current, 1 and 2 week lags of fnancial conditions onto foreign currency futures players' net positions. Te fnancial conditions indices used are UFCI, STLFSI, NFCI and ANFCI with weekly data set from January 2007 till December 2018. Te US dollar index futures is included as a benchmark, since the fnancial conditions are based on US data and the most actively traded foreign currencies are paired against the USD. While RMSE and NRMSE gave mixed results into how current, 1 week and 2 weeks lagged Financial Conditions Indices (FCIs) values are related to speculators and hedgers' net positions, lagged NFCI captured the highest correlation with both players' net positions in Japanese Yen. 95% prediction levels encompassed the actual net positions held, including the fnancial crisis of 2008-2009. Forecasts were lower (higher) for hedgers (speculators) than actual net positions held during the same period. Comparatively, in the period 2016-2017, hedgers (speculators) net positions forecasts were higher (lower) than actual positions. Te latter could be explained by FCIs not being affected during this period's event, compared to net positions. While net positions data were stationary, excess kurtosis was present pointing to non-normal and autocorrelated series. Tis suggests the need to look into other components like non-reportable long or short positions in future analysis. © 2018 Ikhlaas Gurrib.
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This work is licensed under Creative Commons License and full text is openly accessible in CUD Digital Repository. The version of the scholarly record of this work is published in Investment Management and Financial Innovations (2018), accessible online through this link http://dx.doi.org/10.21511/imfi.15(2).2018.16
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Keywords
Financial conditions indices, Foreign currency futures, Hedgers, Net positions, Speculators
Citation
Gurrib, I. (2018). Are key market players in currency derivatives markets affected by financial conditions? Investment Management and Financial Innovations, 15(2), 183–193. https://doi.org/10.21511/imfi.15(2).2018.16