Connecting Equity and Foreign Exchange Markets Through the WM Fix: A Trading Strategy
17 Pages Posted: 15 Nov 2017 Last revised: 17 Aug 2018
Date Written: August 16, 2018
We examine the relationship between equity and foreign exchange markets at, and around, the WM/Reuters benchmark exchange rate known as the the 'Fix'. Execution at the Fix is a service offered by brokers provided they obtain the trade order before 4pm GMT. We have three main goals with this paper: (i) to show a connection between equities and foreign exchange markets via this window; (ii) to leverage this connection using an algorithmic trading strategy; and (iii) to rank various statistical techniques used to make predictions for trading. We are successful in all three endeavors with the best technique producing an out-of-sample annual cumulative return of 4.02% with an annualized Sharpe ratio of 3.43.
Keywords: foreign exchange rates, market microstructure, WM/Reuters Fix, herd behavior
JEL Classification: C51, C52, C53, C58, D91, G41
Suggested Citation: Suggested Citation