Joo Dutschke 387 Assignment 2 Hedge Funds 2012

The purpose of this assignment is to understand how well does an intraday trading strategy, applied to euro dollar currency exchange works. The data used was last price per minute since 00:00 hours in the first day of June of 2007 until the 59th minute of 11pm of December 31st of 2007. A total of 217440 observations, during a period of 6 months. The cumulative return of staying always long on the security is 8,58%, an annual return of 14,77% and an annual volatility of 9,64%. This strategy leads to an info Sharpe Ratio of 1,53 which is a relatively good performance, taking into account the degree of simplicity of this strategy. Now moving to more active trading strategies, which are based on mean reverse zero or one standard deviation and different moving averages (MA), I tried to find better performances and identify some characteristics of each one. The procedures to implement the strategy were (Appendix 1): Firstly compute a moving average of the prices during the previous n periods and compare the last period price with it, if it is above, I go short, if it is below, I establish a long position on the actual minute; Keep doing this for every minute, actively readjusting the position; I considered moving averages of 60, 30, 15, 10 and 5 minutes and also mean vs. mean 1 std deviation.

A curiosity was that at a first instance, I considered to mark the position on the same minute as the one used to compare with the moving average, leading to abnormal returns, and this only would be possible with a superfast hardware and software, so I gave up of this strategy as in a regular situation would not be possible to apply. Returning to the effectively used strategy, the parameters of the three strategies with best performance (measured by info sharpe ratio) were: 60 minutes MA 1 std deviation, 30 minutes MA with no std deviation and 30 minutes MA with no standard deviation. (Appendix 2) Making a comparison between strategies with 1 std deviation and no std deviation, the second ones seem to be work better, generally providing higher info sharpe ratios, with higher returns that compensate enough higher volatilities. Also it is possible to see that these strategies, have a lower trades volume, and by consequence a longer duration for each trade which is definitely an advantage if transaction costs are introduced in the model. In what concerns to the range of the moving average, 60, 30 and 15 minutes had better performances (with annual info sharpe ratios always above 1,5, which are indeed great results in comparison with lower moving averages. Again these kind of strategies are more able to habe positive performances when considering transaction costs. It is possible to see a short position bias (the exception is 5 minutes MA with no std deviation), by looking to the sum of the positions, which means that the price is more times above the moving average than the inverse situation. The conclusion is that high info Sharpe ratios can be obtained through these strategies with particular focus on longer moving averages (60, 30 and 15) rather than short and not considering a std deviation when defining the range for going long or short. The main drawbacks could be transaction costs and the need of advanced technology to perform this way.

Joo Dutschke 387 Assignment 2 Hedge Funds 2012

Establish position minutes 1 2 3 4 5 6

Appendix 1. 5 minutes strategy example

Compute Moving Average

Appendix 2. Strategies Performances

Return with 1 std deviation Moving Average (minutes) Cumulative return Average return per minute Average return per hour Average daily return Average annual return Std dev per minute Std per hour Std dev daily Std dev annually Info Sharpe Ratio per hour Info Sharpe Ratio annually Number of trades Average trades per minute 60 7,01% 0,000% 0,002% 0,05% 12,08% 0,01% 0,09% 0,45% 7,29% 30 10,87% 0,000% 0,003% 0,07% 18,73% 0,01% 0,09% 0,43% 6,95% 15 7,72% 0,000% 0,002% 0,05% 13,34% 0,01% 0,09% 0,42% 6,73% 10 5,04% 0,000% 0,001% 0,03% 8,72% 0,01% 0,09% 0,42% 6,79%

Comparison Return with no std deviation 5 0,93% 0,000% 0,000% 0,01% 1,62% 0,01% 0,08% 0,38% 6,12% 60 16,26% 0,000% 0,004% 0,11% 28,01% 0,02% 0,12% 0,59% 9,58% 30 13,53% 0,000% 0,004% 0,09% 23,34% 0,02% 0,12% 0,59% 9,57% 15 12,46% 0,000% 0,003% 0,08% 21,53% 0,02% 0,12% 0,59% 9,55% 10 3,19% 0,000% 0,001% 0,02% 5,53% 0,02% 0,12% 0,58% 9,30% 5 1,51% 0,000% 0,000% 0,01% 2,65% 0,01% 0,12% 0,57% 9,14%

0,02 1,66
28676 0,13

0,03 2,69
40055 0,18

0,03 1,98
56027 0,26

0,02 1,28
67926 0,31

0,00 0,27
91957 0,42

0,04 2,92
15779 0,07

0,03 2,44
22816 0,10

0,03 2,25
33335 0,15

0,01 0,59
42179 0,19

0,00 0,29
66710 0,31

Average trades per hour

Average trades per day Average trade length (minutes) Sum of positions

7,91
189,96 7,58 -3588

11,05
265,30 5,43 -2629

15,46
371,07 3,88 -1758

18,74
449,86 3,20 -1532

25,38
609,00 2,36 -1382

4,36
104,53 13,78 -2768

6,30
151,12 9,53 -2707

9,20
220,78 6,52 -1500

11,64
279,34 5,15 -1016

18,41
441,80 3,26 21