A Dissertation based on the FX Market

[N9ne]

Hi all,

I'm new here, but have traded a little FX myself. I'm currently an undergraduate in UK studying Economics. The time has come for me to select a dissertation title and do a bit of research.

As is always the case with dissertations, one requires inspiration, and I'm finding it hard to come by!

My main interest is the FX Market. Since I'm doing an Economics degree, it must be linked; I want to do a dissertation in this field - it will be an empirical (rather than theoretical) approach, and I would like to test for something. The obvious one would probably be whether some given currency pair follows a random walk. However, this seems very bread-and-butter and am looking for something slightly varied.

I thought this would be the best place to ask for ideas and suggestions. Does anyone have any broad or narrow areas they can point me to; something which might make an interesting topic for me to a) research, b) write a dissertation on and c) isn't an untouched area. Point (c) is important because this is an undergraduate dissertation and my knowledge, time and the importance of this dissertation are all limited (but fairly significant).

Thank you for your time and ideas.

 

[Rhody Trader]

Take a look at Benoit Mandelbrot's work. His book The (Mis)Behavior of Markets might give you some really interesting ideas for research paths. Be warned, though. He's not a proponent of classic theory where it relates to the markets and provides plenty of solid arguments against the likes of random walk, efficient markets, etc.

 

[kenobi]

Interesting topics you can find in the FX market.

A rather simple one would be the initial market reaction to news announcements in the economic calendar.
You would find some interesting stuff that is actually counterintuitve to the economic theory you were taught :smart:

It is simple, and easy to use correlations to prove the point. and you dont need much historical data....there are so many news announcements that you would not need more than 6 months of news announcements.....metatrader will give you enough.

 

[grantx]

Kenobi,

Good idea. If i may expand, I would suggest choosing and comparing the most watched data, eg CPI, Input/output prices for two countries - US/Eurozone for US/EUR - and examine how the currencies react to their own, and each others, indicators over the course of a year or two.

Grant.

 

[nine]

Adding to the news idea: does the market regularly move in the direction of the news before the news (or in fact do the opposite)? What does this imply?

 

[N9ne]

Thank you all for your replies. They've all been very useful and insightful!

To expand on this, I am thinking perhaps of something rather more applied to economics. I fear my dissertation title may be rejected if it lacks that economics element.

There's a broad area I'm interested in, not necessarily restricted to the FX Market. Perhaps an interesting dissertation would be to explore the relationship between oil, equities and FX. This would be tremendously interesting and would offer me the opportunity to research into the history and the mechanics of not one but three different markets.

However, what would my dissertation specifically be on? I would not be allowed to write a dissertation on merely the 'interactions' between those three very distinct markets. Is there something particular here, which I could explore in greater detail?

 

[kenobi]

Thank you all for your replies. They've all been very useful and insightful!

To expand on this, I am thinking perhaps of something rather more applied to economics. I fear my dissertation title may be rejected if it lacks that economics element.

There's a broad area I'm interested in, not necessarily restricted to the FX Market. Perhaps an interesting dissertation would be to explore the relationship between oil, equities and FX. This would be tremendously interesting and would offer me the opportunity to research into the history and the mechanics of not one but three different markets.

However, what would my dissertation specifically be on? I would not be allowed to write a dissertation on merely the 'interactions' between those three very distinct markets. Is there something particular here, which I could explore in greater detail?

ok mate, you come to a BB to get a topic for yer dissertation. cool. think ye already got a topic. ye just need to read again. wot has been posted by several of us is pretty economical to us.

right, probably it wasnt explained.

in yer economics course you were told....

a) if BOE raises rates....then X happens to the £
b) if Inflation numbers are up........then X happens to the £ ......

and so on.

i dont really know how good yer Uni is.....but will give you a hint.....use rational expectations and market efficiency theory........

a) test against the first 15 minutes following a news release
b) test against the the 240 minutes following a news release
c) compare to economic theory and what the new info brings into the valuation

you will have so many topics to isolate

well, cant get more "economics" than that.

good luck.

 

[grantx]

What about, What will President Bush do if the Saudi's don't play ball re increasing oil production (hint: he'll form an alliance with Venezuela and Iran).

Grant.

 

[CHRISTO9HER]

I just finished my undergraduate economics dissertation, and yes, it kicked ass. It is so important that you pick a good topic. If you pick a good topic you walk straight into a first as long as you can explain what you have found.

My advice to you is to think about data availability right from the start. The people from my class who have written good pieces are the ones who had access to a really good data-set. Pick a topic that uses data you can get easily.

FX data is obviously quite easy to get from a variety of place but it will be quite hard, for example, to get historical data that will tell you how FX prices react to news announcements on a time frame of minutes (which is the only interesting result really). However, if you still have a long time to go before you have to write it, you will be much better off collecting the data in real-time, i.e sitting in front of a chart when a news story breaks and measuring the reaction.

If you do go with the FX market reaction to news topic, it is interesting but econometrically it could be a bit troublesome. Anyway, it would be interesting to test to what extent the market predicts the outcome of the announcement etc. You would certainly need to get a lot of observations in order to come to a firm conclusion (we are talking hundreds of announcements) and this would be very time consuming to do. All depends how much time you want to put into it.

My final piece of advice is not to do a topic JUST because you are interested in it. Think about the conclusion that you are going to be able to come to before you start. The dissertation will only be as interesting as the conclusion. Some people in my class pursued topics just because they were interested in it and didnt consider the data and conclusion and have written **** dissertations.

I, for example, have no interest in equities. Yet I wrote a dissertation using data from the FTSE 100 (easy to get) that was awesome, because I knew what I was going to find before I started.

Hope this helps

C

 

[MrGecko]

Christoph makes a good point;

If you want to study the reactions of currencies to economic announcements, it might be tricky to draw any solid conclusions from it; you could compare the "textbook" result (e.g. High inflation => weaker currency) to the actual market reaction, but a driving factor of this will be how firms (with size to move the market) are positioned for the release and their subsequent effects on price (e.g. short covering) - something you have no hope of being able to find out. Combine that with the possibility that the #(expected reactions) = #(unexpected reactions) and it might be difficult to draw conclusions with any level of confidence.

Maybe that's a dissertation right there; an investigation that shows there are statistically significant drivers of price (read speculation) other than macro (read inflation, the only one I can think would be easy to quantify).

 

[grantx]

Chris,

What was the subject of your dissertation?

Hello Mr Gecko, how's it going, mate?

Grant.

 

[CHRISTO9HER]

Chris,

What was the subject of your dissertation?

Hello Mr Gecko, how's it going, mate?

Grant.

Hi

I'll describe what I wrote about and what I found and sorry if I go into more detail than people find interesting!!

My dissertation was to do with the Capital Asset Pricing Model, one of the most celebrated financial developments of the last few decades and still one of the most useful models to find the expected return on a share.

It basically says that:

Return on share = risk free rate + Beta*(return on market - risk free rate)

Where the beta of a share is a measure of the correlation between the returns to the share and the returns to the market. Essentially the model says that the only type of financial risk that should attract a return is market risk.

Anyway, Beta is found by regressing the returns to the share on the returns to the market for some past period. In the model, "the market" should actually be "all wealth" (i.e it should be equities, bonds, houses, etc etc) but in reality people use a market index as an approximation.

I showed that if you regress the returns to the share on a market index (ie the FTSE 100) and the share is also a component of that index, then the beta value that you get is a biased estimate.

To understand why, consider that if share that is a large component of the index e.g. Shell or BP or HSBC has a great day and makes a 10% gain, the FTSE will also make a gain attributable to that. This effectively increases the correlation between the share and the market and therefore boosts the beta value to an artificially high level.

I found that this bias can be up to 20% of the beta value for the most heavily weighted shares in the index!! This is extremely relevant as the beta value is considered pretty critical by many analysts.

I then went on to find that the size of the bias is affected by market conditions. When the credit crunch hit we saw a MASSIVE shift in the correlation between shares (just think about those days when every bank lost 10% because one of them uncovered losses). The bias has been strongly affected by this.

Anyway, I have attached the final version for anyone who is interested. If anyone actually reads it then let me know what you think.

And a note to N9ne, (the starter of this thread), dont copy it. I am not saying this because I care if you copy it (I actually dont care at all) but all universities are now co-operating to get undergraduate dissertations onto a single database to detect cheating.
But hopefully it might get you thinking about how you might be able to combine your enthusiasm for financial markets with a topic with good economic/econometric content.
Let us know what you decide to research!!

Anyway, cheers guys

C

 

[MrGecko]

Much kudos to you Christoph for posting your dissertation!

I went to warwick (good few years ago now); studied Physics. Did you play Rugby?

 

[CHRISTO9HER]

Much kudos to you Christoph for posting your dissertation!

I went to warwick (good few years ago now); studied Physics. Did you play Rugby?

Good to see a fellow Warwick Alum on here!! (Or at least I will be an alumni in about two weeks)

As for the rugby question, I played in the first year but ended up getting too injured. But the playing was always secondary to the drinking anyway and I have certainly kept that up!! You really cant beat the rugby circles on sports night!

 

[MrGecko]

As for the rugby question, I played in the first year but ended up getting too injured.

pussy

But the playing was always secondary to the drinking anyway and I have certainly kept that up!! You really cant beat the rugby circles on sports night!

WHACK OFF!!!!

I have just sung "OH, THE, CAPTAIN of the 1sts he is a fool! He's only got a teeny weeny tool....." at my desk. seriously.

 

[grantx]

Chris,

Beta and correlation is an interesting area. My dissertation was on the concept of Eros and desire in the Socratic dialogues, not a million miles from yours.

Sod tests and interviews, I’d give you a job on the strength of your summary – this is really impressive, mate.
I look forward to reading it.

Perhaps for your Masters you could do the same but reconstruct the FTSE index by using equally-weighted constituents (or price weighted, or both for a comparative study).

You’ve probably had enough of CAPM for the time being but for future reference look here re Eugene Fama, specifically the pdf’s in the bibliography:

Eugene Fama - Wikipedia, the free encyclopedia

From my memories the rugby players’ behaviour was a cover for a fear of women, or they were closet fags in denial. Of course, Mr Gecko is an exception to these rules (I said “exception”, not “exceptional”, Mr Gecko).

“WHACK OFF!!!!”. God help us.

Grant.

 

[grantx]

Chris.

6000 words? Mine was over 12,000. Don't students have it easy today?

Grant.

 

[MrGecko]

From my memories the rugby players’ behaviour was a cover for a fear of women, or they were closet fags in denial. Of course, Mr Gecko is an exception to these rules (I said “exception”, not “exceptional”, Mr Gecko).

Grant.

It is not the first time that I have been labeled the exception; some have argued that my behaviour was due to a fear of women, and accused me of being a closet fag in denial.

good banter.

 

[CHRISTO9HER]

Chris,

Beta and correlation is an interesting area. My dissertation was on the concept of Eros and desire in the Socratic dialogues, not a million miles from yours.

Sod tests and interviews, I’d give you a job on the strength of your summary – this is really impressive, mate.
I look forward to reading it.

Perhaps for your Masters you could do the same but reconstruct the FTSE index by using equally-weighted constituents (or price weighted, or both for a comparative study).

You’ve probably had enough of CAPM for the time being but for future reference look here re Eugene Fama, specifically the pdf’s in the bibliography:

Eugene Fama - Wikipedia, the free encyclopedia

From my memories the rugby players’ behaviour was a cover for a fear of women, or they were closet fags in denial. Of course, Mr Gecko is an exception to these rules (I said “exception”, not “exceptional”, Mr Gecko).

“WHACK OFF!!!!”. God help us.

Grant.

You're right, it is interesting. One of the things I was amazed to see was how the covariance matrix between shares shifted when the credit crunch hit. All of a sudden the correlations virtually doubled. I was so lucky to have a time period like that to look at; it added so much to the results. Cheers for the link, I have been an admirer of Fama's work for a while now. It was people like him that made me want to become an academic. (Back when I wanted to go down that path)

Chris.

6000 words? Mine was over 12,000. Don't students have it easy today?

Grant.

You're probably right, it is easy being a student these days; I was having 8 hours of teaching a week for most of this year!! Most of my friends do little more than get up for deal or no deal before eating their one meal for the day and getting ready to go out!!

From my memories the rugby players’ behaviour was a cover for a fear of women, or they were closet fags in denial. Of course, Mr Gecko is an exception to these rules (I said “exception”, not “exceptional”, Mr Gecko).

Most of the rugby team cant talk to a girl until the 8th pint of snakebite black has gone down (and sometimes back up). But there is a window between the eigth and the tenth when they're unstoppable. I however am different, I can sometimes talk to them after only 6 Still get through more skirts than the footballers though, now they really are all talk and no trousers.

 

[grantx]

Mr Gecko,

And possibly exceptional to boot.

Grant.