Wednesday, February 16, 2011
Lower Along With The Risk
he thinking here is simple. It is necessary that past price fluctuations should not influence future ones, but it isn’t sufficient to make markets efficient. For this scenario the rise in volatility is proportionate to the square root of time, hence the volatility of fortnightly change is the same as the square root of two multiplied by the weekly volatility. If we test the volatility of actual to random walk, we can see whether a price follows random walk or not. When random walk volatility is higher than actual volatility then falls in one period lead to rises eventually becase of prices mean revert. By seeing my chart one can see the ratio of actual to random walk volatility for three primary exchange rates. The subsequent fall of the pound after a few weeks of rise is suggested hence. The ratios still make it to one however, within 12 per cent. Inefficieny exists, but to such a small extent that betting on it could easily result in a large amount of monetary loss. This is consistent with a finding that the ability to make good profits from forex trading diminished in the 1990s, as investors wised up to momentum effects. The Random walk is not strictly followed in terms of extremely short periods. It isn’t out of the question to make money from a random walk if expecting surprises is your trick. Our data findings show a roughly random rate move for foreign exchange over a 17 year period. It’s possible that there are shorter periods when the market is less efficient. If traders were aware of huge changes like the US dollar becoming worth nothing in the next year. it would appear as if money making would have been possible had the dollar been purchased at its low pint since it over reacted and then mean reverted. Still, the market is not inefficient. The profits made from purchasing dollar at its low point aren’t risk free ones but instead a reward for taking the crash risk. Variation in the crash risk is one of the likely character in the exchange rates in the recent years. The message here is clear The retail investors in general lag behind the banks in two points, hence allowing banks to do it. Exchange rate prediction is the first point here since banks have proprietary knowledge. Banks virtually pay zero amount for trading, thereby making hoovering a profitable venture since they have a cheap hoover. IF anyone isn’t aware of these edges, forex trading can be a risky game for them
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