Please read Part I for the introduction, Part II for a study of the spread between USDINR and the dollar indices and Part III for a spread-trading back-test on daily returns.
Weekly vs. Daily
In our previous posts, we used daily returns to setup the analysis. However, analyzing daily series on currencies and commodities is problematic. They trade 24/7 in a global marketplace and “closing” prices for commodities and currencies are hard to pin down at a granular level across markets. One way to ameliorate this issue is to use a weekly or a monthly series instead.
Here are the plots of the spreads and p-values from the adf-tests applied to weekly returns:
The back-test results mirror that of the daily series, with bets on momentum carrying through on the USDINR and DTWEXM pairs:
This gives us more confidence in our back-tests. We end our series with the following caveats:
- Trading the spread involves trading both legs (as discussed in Part III.)
- One can only buy a currency by selling another. i.e., buying USDINR implies going long USD and short INR.
- Using the above analysis, if a trade involves buying USDINR in one of the legs, it does not inform anything on relative valuation of USD or INR.
Code and charts on github.
Comments are closed, but trackbacks and pingbacks are open.