Detecting 'Fake' Price Movements: A Convergence/Divergence Indicator

Brunel University London, Economics and Finance Working Paper No. 15-15

24 Pages Posted: 26 Mar 2016 Last revised: 16 Jun 2018

See all articles by Guglielmo Maria Caporale

Guglielmo Maria Caporale

Brunel University London - Department of Economics and Finance; London South Bank University; CESifo (Center for Economic Studies and Ifo Institute); German Institute for Economic Research (DIW Berlin)

Luis A. Gil-Alana

University of Navarra - Department of Economics

Oleksiy Plastun

Sumy State University

Date Written: May 25, 2015

Abstract

This paper develops a new pair trading method to detect “fake” price movements and arbitrage opportunities that is based on a convergence/divergence indicator (CDI) belonging to the oscillatory class. The proposed technique is applied to a cross-currency pair (EURAUD, 2010-2015), and trading rules based on CDI signals are obtained. The CDI indicator is shown to outperform others of the oscillatory class and to generate profits (in the case of EURAUD) without the need for incorporating additional algorithms in the trading strategy. The suggested approach is of general interest and can be applied to different financial markets and assets.

Keywords: Pair trading, oscillator, trading strategy, convergence/divergence indicator (CDI)

JEL Classification: G12, C63

Suggested Citation

Caporale, Guglielmo Maria and Gil-Alana, Luis A. and Plastun, Oleksiy, Detecting 'Fake' Price Movements: A Convergence/Divergence Indicator (May 25, 2015). Brunel University London, Economics and Finance Working Paper No. 15-15, Available at SSRN: https://ssrn.com/abstract=2754622 or http://dx.doi.org/10.2139/ssrn.2754622

Guglielmo Maria Caporale

Brunel University London - Department of Economics and Finance ( email )

Kingston Lane
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HOME PAGE: http://www.brunel.ac.uk/about/acad/bbs/bbsstaff/ef_staff/guglielmocaporale/

London South Bank University ( email )

Centre for Monetary and Financial Economics
London
United Kingdom

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

German Institute for Economic Research (DIW Berlin) ( email )

Mohrenstraße 58
Berlin, 10117
Germany

Luis A. Gil-Alana

University of Navarra - Department of Economics ( email )

Campus de Arrosadia
Pamplona, 31006
Spain

Oleksiy Plastun (Contact Author)

Sumy State University ( email )

Rymskyi-Korsakov str., 2
Sumy, 40000
Ukraine

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