The

HANDBOOK
of
TRADING
STRATEGIES FOR NAVIGATING
AND PROFITING FROM CURRENCY,
BOND, AND STOCK MARKETS

Greg N. Gregoriou
Editor

Me
Graw
Hill
New York Chicago San Francisco
Lisbon London Madrid Mexico City
Milan New Delhi San Juan Seoul
Singapore Sydney Toronto
CONTENTS

EDITOR xvii
CONTRIBUTORS xix
ACKNOWLEDGMENTS v xxxiii

PART U EXECUTION A N D MOMENTUM TRADING 1

CHAPTER 1 PERFORMANCE LEAKAGE A N D VALUE

D I S C O U N T S O N THE T O R O N T O
STOCK EXCHANGE 3
Lawrence Kryzanowski and Skander Lazrak
Abstract 3
Introduction 4
Sample and Data 5
Measures of Performance Leakage and Value Discounts 5
Empirical Estimates for the TSX 7
Conclusion 18
Acknowledgments 18
References 19
Notes 20

CHAPTER 2 I N F O R M E D T R A D I N G I N PARALLEL
A U C T I O N A N D DEALER MARKETS:
THE CASE OF THE L O N D O N
STOCK EXCHANGE 23
Pankaj K. Jain, Christine Jiang, Thomas H. Mclnish, and
Nareerat Taechapiroontong
Abstract 23
Introduction 23
Trading Systems and Venues 24
Institutional Background, Data, and Methodology 27
vi CONTENTS

Empirical Results 30
Conclusion 35
Acknowledgments 36
References 36
Notes 38

CHAPTER 3 M O M E N T U M T R A D I N G FOR THE

PRIVATE INVESTOR 39
Alexander Molchanov and Philip A. Stork ~ - _•
Abstract 39
Introduction 39
Data 40
Momentum Trading Results 41
Robustness Tests 45
Trading with a Volume Filter 47
Private Investor Trading 49
Conclusion 50
Acknowledgments 51
References 51
Notes 52

CHAPTER 4 T R A D I N G IN TURBULENT MARKETS:

DOES MOMENTUM WORK? 53
Tim A. Herberger and Daniel M. Kohlert
Abstract 53
Introduction 53
Literature Review 54
Data and Methodology 55
Results • 57
Conclusion 62
References 63
Notes 65

CHAPTER 5 THE FINANCIAL FUTURES M O M E N T U M 67

Juan Ayora and Hipblit Torn
Abstract 67
Introduction 67
Literature Review 68
 CONTENTS

Data 69
Methodology and Results 69
Conclusion 77
Acknowledgments 79
References 79
Notes 80

CHAPTER 6 ORDER PLACEMENT STRATEGIES IN

DIFFERENT MARKET STRUCTURES:
A PRIMER "" 83
Giovanni Petrella
Abstract 83
Introduction 83
Costs and Benefits of Limit Order Trading 84
Trading in a Continuous Order-Driven Market 86
Trading in a Call Auction 89
Conclusion 91
References 92

PART UU TECHNICAL TRADING 95

CHAPTER 7 PROFITABILITY OF TECHNICAL

TRADING RULES IN AN EMERGING
MARKET 97
Dimitris Kenourgios and Spyros Papathanasiou
Abstract 97
Introduction 98
Methodology \ 100
Data and Empirical Results 103
Conclusion .. 108
References 109
Notes 111

CHAPTER 8 TESTING TECHNICAL TRADING RULES

AS PORTFOLIO SELECTION STRATEGIES 113
Vlad Pavlov and Stan Hum
Introduction 113
viii CONTENTS

Data 115
Portfolio Formation 116
Bootstrap Experiment 122
Conclusion 124
Acknowledgments 126
References 126
Notes 127

CHAPTER 9 DO TECHNICAL TRADING RULES

INCREASE THE PROBABILITY OF
WINNING? EMPIRICAL EVIDENCE
FROM THE FOREIGN EXCHANGE
MARKET 129
Alexandre Repkine
Abstract 129
Introduction 130
Empirical Methodology 131
Empirical Results 135
Conclusion 139
References 140

CHAPTER 10 TECHNICAL ANALYSIS IN

TURBULENT FINANCIAL MARKETS:
DOES NONLINEAR1TY ASSIST? 141
Mohamed El Hedi Arouri, Fredj Jawadi, and Due Khuong Nguyen
Abstract 141
Introduction 142
Nonlinear Modeling for Technical Analysis 143
Data and Empirical Results 147
Conclusion 150
References 150
Notes 153

CHAPTER 11 PROFITING FROM THE DUAL-MOVING

AVERAGE CROSSOVER WITH
EXPONENTIAL SMOOTHING 155
Camillo Lento
Abstract 155
 CONTENTS

Introduction 156
Background on the Moving Averages 157
Methodology 159
Data 161
Trading with the Exponentially
Smoothed DMACO 162
Conclusion 167
References 168
Notes v 170

CHAPTER 12 SHAREHOLDER D E M A N D S A N D THE

DELAWARE DERIVATIVE A C T I O N 171
Edward Pekarek
Abstract 171
Introduction 171
Policy Purposes for Derivative Actions 173
Demand Requirements 174
Standing to Sue Derivatively 178
Futility Excuses the Demand Requirement 179
Futility, Director Independence, and Business
Judgment 180
Conclusion 181
Acknowledgments 182
References 183

PART U U 0 EXCHANGE-TRADED FUND STRATEGIES 187

CHAPTER 13 LEVERAGED EXCHANGE-TRADED

FUNDS AND THEIR TRADING
STRATEGIES 189
Narat Charupat
Abstract 189
Introduction 189
Trading Strategies 190
Conclusion 197
References 197
Notes 197
CONTENTS

CHAPTER 1 4 ON THE IMPACT OF EXCHANGE-

TRADED FUNDS OVER NOISE
TRADING: EVIDENCE FROM
EUROPEAN STOCK EXCHANGES 199
Vasileios Kallinterakis and Sarvinjit Kaur
Abstract 199
Introduction 199
Data 201
Methodology ' "" 201
Descriptive Statistics 204
Results; Conclusion 204
References 211
Notes 211

CHAPTER 1 5 PENETRATING FIXED-INCOME

EXCHANGE-TRADED FUNDS 213
Gerasimos G. Rompotis
Abstract 213
Introduction 213
Methodology 215
Data and Statistics 217
Empirical Results 220
Conclusion 229
References 231

CHAPTER 1 6 SMOOTH TRANSITION AUTOREGRESSIVE

MODELS FOR THE DAY-OF-THE-WEEK
EFFECT: AN APPLICATION TO THE
S&P 500 INDEX 233
Eleftherios Giovanis
Abstract 233
Introduction 233
Literature Review 234
Methodology 235
Data 238
Empirical Results 239
Conclusion 249
References 250
 CONTENTS

PART B V FOREIGN EXCHANGE MARKETS,

ALGORITHMIC TRADING, AND RISK 253

CHAPTER 1 7 DISPARITY OF USD INTERBANK

INTEREST RATES IN HONG KONG
AND SINGAPORE: IS THERE ANY
ARBITRAGE OPPORTUNITY? 255
Michael C. S. Wong and Wilson F. Chan
Abstract 255
Introduction 255
HIBOR and SIBOR 256
Data And Findings 257
Explanations for the HIBOR-SIBOR Disparity 259
Conclusion 260
References 261

CHAPTER 1 8 FOREX TRADING OPPORTUNITIES

THROUGH PRICES UNDER CLIMATE
CHANGE 263
Jack Penm and R. D. Terrell
Abstract 263
Introduction 263
Methodology 267
Data and Empirical Application 271
Conclusion 2 74
References 274

CHAPTER 1 9 THE IMPACT OF ALGORITHMIC

TRADING MODELS ON THE
STOCK MARKET 275
Ohannes G. Paskelian
Abstract 275
Introduction 276
The Impact of Algorithmic Trading on the Market 277
Algorithmic Strategies 279
Algorithmic Trading Advantages 281
Algorithmic Trading Beyond Stock Markets 282
xii CONTENTS

Conclusion 282
References 283

CHAPTER 20 TRADING IN RISK DIMENSIONS 287

Lester Ingber
Abstract 287
Introduction 287
Data 288
Exponential Marginal Distribution Models " - - 288
Copula Transformation 289
Portfolio Distribution 293
Risk Management 294
Sampling Multivariate Normal Distribution 295
Conclusion 297
References 298

CHAPTER 21 DEVELOPMENT OF A RISK-

MONITORING TOOL DEDICATED
TO COMMODITY TRADING 301
Emmanuel Eragniere, Helen O 'Gorman, and Laura Whitney
Abstract 301
Introduction 301
Literature Review 303
Methodology 305
Conclusion 313
Resources 314

PART V TRADING VOLUME AND BEHAVIOR 317

CHAPTER 2 2 SECURITIES TRADING, ASYMMETRIC

INFORMATION, AND MARKET
TRANSPARENCY 319
Mark D. Flood, Kees G. Koedijk, MathijsA. van Dijk, and
Irma W. van Leeuwen
Abstract 319
Introduction 320
 CONTENTS xiii

Experimental Design and Terminology 323

Data 326
Results 328
Conclusion 337
Acknowledgments 338
References 339
Notes 341

CHAPTER 23 ARBITRAGE RISK AND THE HIGH-

VOLUME RETURN PREMIUM 343
G. Geoffrey Booth and Umit G. Gurun
Abstract 343
Introduction 343
Data and Method 344
Tests 346
Conclusion 348
References 349

CHAPTER 24 THE IMPACT OF HARD VERSUS SOFT

INFORMATION ON TRADING VOLUME:
EVIDENCE FROM MANAGEMENT
EARNINGS FORECASTS 351
PaulBrockman and James Cicon
Abstract 351
Introduction 352
Data and Methodology 353
Empirical Results 356
Conclusion 361
References \ 362

CHAPTER 25 MODELING BUBBLES AND

ANTI-BUBBLES IN BEAR MARKETS:
A MEDIUM-TERM TRADING
ANALYSIS 365
Dean Fantazzini
Abstract 365
Introduction 365
xiv CONTENTS

Log-Periodic Models: A Review 367

Empirical Analysis with World Stock Market Indexes 372
Out-of-Sample Empirical Analysis 381
Conclusion 387
References 387

CHAPTER 26 STRATEGIC FINANCIAL

INTERMEDIARIES WITH
BROKERAGE ACTIVITIES ... 389
Laurent Germain, Fabrice Rousseau, and Anne Vanhems
Abstract 389
Introduction 390
The Benchmark Model: No Noise Is Observed 392
The General Model: When Some Noise Is Observed 394
Conclusion 398
References 398
Appendix 399

CHAPTER 27 FINANCIAL MARKETS, INVESTMENT

ANALYSIS, AND TRADING IN
PRIMARY AND SECONDARY
MARKETS 403
Andre F. Gygax
Abstract 403
Introduction 404
Investment Analysis and Types of Trading 404
Composition of Trading Volume and Trading 406
Trading in Primary Versus Secondary Markets 407
Conclusion 412
References 412

CHAPTER TRADING AND OVERCONFIDENCE 417

Ryan Garvey and Fei Wu
Abstract 417
Introduction 417
Data 418
 CONTENTS XV

Empirical Results 420

Conclusion 425
References 426
Notes 427

CHAPTER 2 9 CORRELATED ASSET TRADING AND

DISCLOSURE OF PRIVATE
INFORMATION 429
Ariadna Dumitrescu - -"
Abstract 429
Introduction 429
The Model 433
Disclosure of Information and Market Liquidity 436
Conclusion 440
Acknowledgments 440
References 440

INDEX 443