Profitability of Trading in the Direction of Asset Price Jumps – Analysis of Multiple Assets and Frequencies
15 Pages Posted: 23 Jan 2017
Date Written: January 22, 2017
The profitability of a trading system based on the momentum-like effects of price jumps was tested on the time series of 7 assets (EUR/USD, GBP/USD, USD/CHF and USD/JPY exchange rates and Light Crude Oil, E-Mini S&P 500 and VIX Futures), in each case for 7 different frequencies (ranging from 1-Minute to 1-Day), over a period of more than 20 years (for all assets except for the VIX) ending in the second half of 2015. The proposed trading system entered long and short trades in the direction of price jumps, for the closing price of the period in which the jump occurred. The position was held for a fixed number of periods that was optimized on the in-sample period. Jumps were identified with the non-parametric L-Estimator whose inputs (period used for local volatility calculation and confidence level used for jump detection) were also optimized on the in-sample period. The proposed system achieved promising results for the 4 currency markets, especially at the 15-minute and 30-minute frequencies at which 3 out of the 4 tested currencies turned profitable (with highest profits achieved by USD/CHF, followed by EUR/USD and GBP/USD), with the profits totaling up to 30-50% p.a. in the case of a high-leverage scenario, or 15-25% in the case of a low-leverage scenario. Additionally, the 5-minute frequency turned profitable for USD/CHF and the 4-hour frequency for GBP/USD, while the 1-minute frequency was unprofitable in all cases due to the commissions and the 1-day frequency contained too few jumps to make any conclusions. As for the futures markets, the system achieved profits only on the Light Crude Oil market, on the frequencies of 1-hour, 4-hour and 1-day, with the profits totaling up to 20% p.a. in the case of high leverage or 10% p.a. in the case of low leverage. For USD/JPY, E-Mini S&P 500 Futures and VIX Futures the system achieved mostly a loss. We attribute this (in the latter two cases) to the effect of a rising market risk premium in the case of negative jumps, going against the jump-momentum effect used by the system.
Keywords: Asset price jumps, L-Estimator, High-frequency trading, Momentum trading, Investment strategy
JEL Classification: C14, C58, G11, G14, G17
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