Do Foreign Exchange Fund Managers Behave Like Positive Feedback Traders?

Quantitative Finance 13: 1125-1134, 2013

27 Pages Posted: 23 Nov 2011 Last revised: 1 Feb 2016

See all articles by Remco C. J. Zwinkels

Remco C. J. Zwinkels

Vrije Universiteit Amsterdam; Tinbergen Institute - Tinbergen Institute Amsterdam (TIA)

Willem F. C. Verschoor

Vrije Universiteit Amsterdam, School of Business and Economics; Tinbergen Institute - Tinbergen Institute Amsterdam (TIA)

Date Written: 2011

Abstract

This paper introduces a Heterogeneous Agent Model (HAM) for foreign exchange fund managers, and estimates it on currency trader indices. Fund managers dynamically allocate capital conditional on recent performance to a value strategy, a momentum strategy, and a carry strategy. Estimation results reveal that a large part of the behavior of currency managers can indeed be described by these three simple strategies, and currency managers behave like positive feedback traders at the short run, but as negative feedback traders at the longer run. We finally show that fund managers are switching in the correct direction, but could improve performance by switching less aggressively.

Keywords: heterogeneous agents, currency trading, style investing

JEL Classification: F3, G11, G15

Suggested Citation

Zwinkels, Remco C.J. and Verschoor, Willem F. C., Do Foreign Exchange Fund Managers Behave Like Positive Feedback Traders? (2011). Quantitative Finance 13: 1125-1134, 2013. Available at SSRN: https://ssrn.com/abstract=1963069 or http://dx.doi.org/10.2139/ssrn.1963069

Remco C.J. Zwinkels (Contact Author)

Vrije Universiteit Amsterdam ( email )

De Boelelaan 1105
Amsterdam, NL-1081HV
Netherlands
+31 20 59 85220 (Phone)

HOME PAGE: http://research.vu.nl/en/persons/remco-zwinkels

Tinbergen Institute - Tinbergen Institute Amsterdam (TIA) ( email )

Gustav Mahlerplein 117
Amsterdam, 1082 MS
Netherlands

Willem F. C. Verschoor

Vrije Universiteit Amsterdam, School of Business and Economics ( email )

De Boelelaan 1105
Amsterdam, 1081 HV
Netherlands

Tinbergen Institute - Tinbergen Institute Amsterdam (TIA) ( email )

Gustav Mahlerplein 117
Amsterdam, 1082 MS
Netherlands

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