Short Term Trading Strategy of Foreign Currency in an Emerging Market - An Econometric Approach

This project shows the algorithm appropriate for short term trading strategies and techniques to leverage these strategies. The Durbin Watson statistic shows market inefficiency. Non-parametric models are used. The returns are not correlated but they show some amount of volatility clusterization which triggered the use of GARCH family to forecast returns, and the exponential GARCH is used to capture any symmetric effect in the data. There has been a prolonged public disagreement in much experience rather thantheoretical work as to whether the forex market is efficient or not. I performed a testfor market efficiency and random walk on a single pair of prices. That is the UnitedStates dollar and the Euro. The Durbin Watson statistic in linear regression is usedto run my conclusion of market inefficiency and no random walk. This resultindicates the creation of an opportunity for arbitrage trading and its short termtrading strategies in the forex market