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A Research on the Shock Effect of Economic Data Release in Forex Market

Author: LanZhiQing
Tutor: ZhuJianPing
School: Xiamen University
Course: Quantitative Economics
Keywords: Decision Tree Shock Effect Forex Trading
CLC: F832.6
Type: Master's thesis
Year: 2014
Downloads: 10
Quote: 0
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Abstract


Forex market is a5×24hours consecutive trading global market, which is responsive on information. After the release of one country’s economic indicator, the corresponding currency pair’s price will have a sensitive and rapid response, forming a shock effect. This shock effect differs significantly due to the important level of economic indicators, deviation between indicators’actual value, previous value and market expectation value. After years of development, lots of quantitative trading strategies have been applied in forex market. There is also a special strategy for economic data trading, however, the existing strategy is rather than objective in the setting of take profit point, lack of the guidance of scientific and quantitative statistical methods.Different characteristics of economic data will result in varying degrees of shock effects, and so forex market participants will have different reactions. This relationship can be represented by the form of if-then rules. In addition, the shock effect of economic data release is often manifested in a smaller time frame, so the use of high-frequency data is inevitable. Decision tree algorithm is an important and widely used classification algorithm in data mining, which has a relatively sound analysis system after years of development. The modeling results of decision tree algorithm will be a series of if-then rules, which are intuitive and easy to interpretation. This algorithm also shows good robustness, especially for processing high-frequency data.This paper aims at providing a scientific and quantitative foundation for take profit point setting in economic data trading strategy. Main work of this paper is reflected in the following aspects:Firstly, the author reviews the research progress and hot spots in the fields of quantitative trading, data mining and forex trading, and combs research in related fields.Further, the author expounds the principle of decision tree algorithm, and applies decision tree algorithm to research on the shock effect of7direct currency pairs, i.e., EUR/USD, GBP/USD, AUD/USD, NZD/USD, USD/JPY, USD/CHF, USD/CAD. Modeling result shows the volatility range of different currency pairs in different cases, and the model performs well.Finally, the author summarizes price volatility range of different direct currency pairs under different situations after economic data release, and obtained preliminary proposals for setting of take profit points under different circumstances. The study also find that the size of the shock effect varies significantly according to directions of the overall impact of the currency pair, important level of the indicators, deviations between actual value, previous value and expected value.

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CLC: > Economic > Fiscal, monetary > Finance, banking > China's financial,banking > Exchange rate,foreign financial relations
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