Stephanos Papadamou

Improving technical trading systems by using a new MATLAB-based genetic algorithm procedure

Recent studies in financial markets suggest that technical analysis can be a very useful tool in predicting the trend. Trading systems are widely used for market assessment however parameter optimization of these systems has adopted little concern. In this paper, to explore the potential power of digital trading, we present a new MATLAB tool based on genetic algorithms, which specializes in parameter optimization of technical rules. It uses the power of genetic algorithms to generate fast and efficient solutions in real trading terms. Our tool was tested extensively on historical data of a UBS fund investing in Emerging stock markets through a specific technical system. Results show that our proposed GATradeTool outperforms commonly used, non-adaptive, software tools with respect to the stability of return and time saving over the whole sample period.

ARMED CONFLICTS AND CAPITAL MARKETS: THE CASE OF THE ISRAELI MILITARY OFFENSIVE IN THE GAZA STRIP

This paper addresses the issue of the impact that armed conflicts have on capital markets. It focuses on the recent Israeli military offensive in the Gaza Strip launched in late 2008 and concluded in early 2009. The paper examines the effects of this armed conflict on the return and volatility of the general index of the Tel Aviv Stock Exchange (TASE), as well as on the government bond index. Furthermore, event study methodology is applied to identify markets’ reactions to the Israeli military operations in the Gaza Strip.

Evaluating the style-based risk model for equity mutual funds investing in Europe

American equity mutual funds of varying investment styles investing in Europe is examined, using Value at Risk (VaR) and expected tail loss (ETL) models developed through three techniques (parametric, nonparametric and style-based approach). Alternative VaR and ETL implementations might impact the market risk forecast. It is necessary to avoid biasing fund risk estimates. Particular attention is given to the style-based risk approach by comparing it to the other methods. A performance evaluation of the models is approached from two directions: statisical model selection and model selection based on a loss function. The empirical results show that the particular investment style of a mutual fund must guide and determine which VaR and ETL model may be applied in order to extract accurate risk estimates. For the least diversified funds that overweight growth and underweight value stocks, the style-based risk model produce significantly lower VaR and ETL estimates than do the other models. The results for the well-diversified fund show an opposite significance pattern. Through ‘backtesting’ procedures, additional evidence is provided for the significance of testing frequency and size of tail losses in order to rank risk models.

Investigating the profitability of technical analysis systems on foreign exchange markets

Reviews previous research on exchange rate forecasting, identifies some problems in building a predictive model and examines the profitability of using various technical rules (as used by traders) in the USD/DM and USD/BP foreign exchange markets. Takes 1989‐1996 data, divided into two sub‐periods with different macroeconomic features; and compares the results from the technical rules in detail and with a buy and hold strategy. Finds that no rules produced statistically significant profits for the whole period (although they did for the first sub‐period) and some evidence that buy and hold is superior, especially if risk is taken into account. Considers the implications of the findings and the underlying reasons for them.

The Monetary Transmission Mechanism: Evidence from Eight Economies in Transition

Abstract We examine in this paper the importance of banks’ behavior in the transmission of the monetary policy to the real economy. Monthly data from eight economies in transition that recently became members of the European Union and the techniques of cointegration and Error Correction models are used, in order to investigate the relationship between intermediation margin spread (IMS, official lending rate minus deposit rate) and industrial production. Given the low development of corporate bond market and the dependence of non-financial agents on banking credits, we find that in many countries the IMS is an important leading indicator of industrial production. However, in countries characterized by credit access constraints (Estonia and Latvia) evidence for the traditional money channel is found. Evidence for both money and credit channels is found in Poland and Hungary. These results imply that a common monetary policy implemented by the European Central Bank may be transmitted in different ways across the new members of the enlarged European Union with different effects on real output in each country.

Yield spreads and real economic activity in East European transition economies

Recent research in developed countries provides evidence for the significant role of the yield spread on real economic activity. Using k-months industrial production growth rate model, this article attempts to ascertain whether similar results are obtained for countries from East Europe (Czech Republic, Poland, Hungary and Slovakia). The results suggest that the interest rate spread does indeed have some predictive power over the 24-months across the countries. These results remain qualitative robust to the inclusion of additional variables and to the change of unemployment rate as a different measure of economic activity. Cyclical movements of volatility appear to be unable to account for the usefulness of the spread for forecasting industrial production growth. Finally, it is found that the term spread is a better indicator of future real growth in countries with low and stable inflation (Czech Republic) and not in countries characterized by high and volatile inflation (Hungary).

Significance of risk modelling in the term structure of interest rates

This study examines the significance of risk modelling and asymmetries when researchers test the popular economic theories concerning the term structure of interest rates. A panel data set of returns on government bond portfolios was used and methods to account for related movements in risk premia across assets with different currency denomination were employed. Rather than attempting to model risk directly in terms of observables, the study has instead exploited an implication of the CAPM concerning how risk premia for a given maturity structure would vary through time in a related manner across different type of assets. In light of recent non-linear research in the area of term structure of interest rates the hypothesis is investigated that the spread effect might have a non-linear impact on excess holding period yield (EHPY). Non-linear effects of spread on EHPY were found in all the maturity structure exception being the short-term maturities. There was evidence for a mean reversion process of returns only for large spread effects in international bond markets. Concerning the rational expectation hypothesis the empirical work provides evidence against it. However, testing this hypothesis over the longer maturity bonds can be very sensitive to the modelling process of risk and possible asymmetries.

The effect of the market-based monetary policy transparency index on inflation and output variability

This paper examines empirically the effectiveness of the Federal Reserve’s policy under different levels of transparency by using a dynamic and continuous market-based index proposed by Kia (2011) on inflation volatility and output volatility. In theory, the more transparent the monetary policy, the less volatile the money market will be with fewer disturbances and thus the more stable will be the economy. First, a bivariate VAR-BEKK-GARCH(1,1) model is estimated for inflation and output variables in the US economy in order to produce conditional variances and covariance over the period October 1982 to December 2011. Second, by incorporating conditional variances and transparency in a VAR model, impulse response functions reveal that after a positive shock in the Federal Reserve’s transparency (i.e. market participants consider the Federal Reserve’s actions to be more transparent), there is a statistically significant decrease in both inflation volatility and output volatility. Our results reveal the dynamic and crucial role that a central bank’s transparency plays in retaining economic stability and assuring the forecasts concerning inflation and economic growth made by the economic units.

Exoploring the benefits of international diversification and currency hedging for international fund portfolios

Outlines previous research on international investment portfolios and presents a study of diversification and hedging on money market, bond and equity funds from UK, US and Japanese investors’ points of view. Explains the methodology, uses 1995‐1998 data to calculate returns and discusses the results. Suggests that foreign bonds and equities reduce exchange rate risk more effectively than money market instruments, although some of that risk is not diversifiable. Compares the benefits of diversification and hedging for investors in the three countries at different levels of risk and concludes that optimum asset allocation depends on the fund market characteristics, risk preferences and investor perspective.

Terrorism and economic sentiment in European countries

Abstract Purpose Terrorist events are unforeseen and have the potential to shake and rattle markets and investors. The purpose of this study is to examine whether major terrorist incidents have affected the Economic Sentiment Indicator (ESI) in four European countries. Methodology/approach An index is constructed that weights the severity of each event and then used to evaluate through the use of vector autoregressive and impulse response analysis estimation techniques whether or not and to what extent the ESI has been affected. Findings Effects were more pronounced and evident in the case of France and Germany while the ESI in Spain and Great Britain did not appear to be particularly affected by terrorist incidents. Research limitations/implications The effects of terrorism on economic sentiment in other countries will provide additional evidence that will allow more robust and conclusive statistical inferences. Originality/value of the chapter The impact of terrorist activity on the ESI for the four European countries studied here has not been examined before using VAR and impulse response analysis.