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Does high frequency trading affect technical analysis and market efficiency? And if so, how?

Viktor Manahov, Robert Hudson and Bartosz Gebka

Journal of International Financial Markets, Institutions and Money, 2014, vol. 28, issue C, 131-157

Abstract: In this paper we investigate how high frequency trading affects technical analysis and market efficiency in the foreign exchange (FX) market by using a special adaptive form of the Strongly Typed Genetic Programming (STGP)-based learning algorithm. We use this approach for real one-minute high frequency data of the most traded currency pairs worldwide: EUR/USD, USD/JPY, GBP/USD, AUD/USD, USD/CHF, and USD/CAD. The STGP performance is compared with that of parametric and non-parametric models and validated by two formal empirical tests. We perform in-sample and out-of-sample comparisons between all models on the basis of forecast performance and investment return. Furthermore, our paper shows the relative strength of these models with respect to the actual trading profit generated by their forecasts. Empirical experiments suggest that the STGP forecasting technique significantly outperforms the traditional econometric models. We find evidence that the excess returns are both statistically and economically significant, even when appropriate transaction costs are taken into account. We also find evidence that HFT has a beneficial role in the price discovery process.

Keywords: Technical trading rules; Genetic Programming; Exchange rate (search for similar items in EconPapers)
JEL-codes: F31 G15 (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (25)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:intfin:v:28:y:2014:i:c:p:131-157

DOI: 10.1016/j.intfin.2013.11.002

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Journal of International Financial Markets, Institutions and Money is currently edited by I. Mathur and C. J. Neely

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