TY - JOUR
T1 - Measuring the efficiency of the intraday forex market with a universal data compression algorithm
AU - Shmilovici, Armin
AU - Kahiri, Yoav
AU - Ben-Gal, Irad
AU - Hauser, Shmuel
PY - 2009
Y1 - 2009
N2 - Universal compression algorithms can detect recurring patterns in any type of temporal data - including financial data - for the purpose of compression. The universal algorithms actually find a model of the data that can be used for either compression or prediction. We present a universal Variable Order Markov (VOM) model and use it to test the weak form of the Efficient Market Hypothesis (EMH). The EMH is tested for 12 pairs of international intra-day currency exchange rates for one year series of 1, 5, 10, 15, 20, 25 and 30 min. Statistically significant compression is detected in all the time-series and the high frequency series are also predictable above random. However, the predictability of the model is not sufficient to generate a profitable trading strategy, thus, Forex market turns out to be efficient, at least most of the time.
AB - Universal compression algorithms can detect recurring patterns in any type of temporal data - including financial data - for the purpose of compression. The universal algorithms actually find a model of the data that can be used for either compression or prediction. We present a universal Variable Order Markov (VOM) model and use it to test the weak form of the Efficient Market Hypothesis (EMH). The EMH is tested for 12 pairs of international intra-day currency exchange rates for one year series of 1, 5, 10, 15, 20, 25 and 30 min. Statistically significant compression is detected in all the time-series and the high frequency series are also predictable above random. However, the predictability of the model is not sufficient to generate a profitable trading strategy, thus, Forex market turns out to be efficient, at least most of the time.
KW - Efficient Market Hypothesis
KW - Forex Intra-day trading
KW - Universal prediction
KW - Variable Order Markov
UR - http://www.scopus.com/inward/record.url?scp=59349101204&partnerID=8YFLogxK
U2 - 10.1007/s10614-008-9153-3
DO - 10.1007/s10614-008-9153-3
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AN - SCOPUS:59349101204
SN - 0927-7099
VL - 33
SP - 131
EP - 154
JO - Computational Economics
JF - Computational Economics
IS - 2
ER -