Thursday, November 22, 2012

Does CAPM model make sense for trading systems in the Forex market?


With this question I want to initiate series of reflections about the construction of a separate, not discussed here before, methodology of the speculations on derivatives. The practical realization of this idea, which I will develop in subsequent posts, will be carried out using the methods and achievements of the modern theory of portfolio selection. One of the concepts operating within it is known as CAPM, i.e. Capital Asset Pricing Model. The model mentioned here was originally formulated for equity portfolios, and naturally is followed by the idea - good or bad - to transplant its prey on the ground of derivative instruments, including Forex.



Any idea can be looked at in two ways - either enthusiastically or critically. This first look is the prerogative of the creator, but it happens that from the beginning he is skeptical of his work. However, there is no shortage of criticism against both the CAPM model and its use in the derivatives market. Recently, searching text resources devoted to the construction of intelligent trading strategies, I came across a very interesting post. On the other hand, not so long ago, I heard from fellow investor, who is operating on the basis of fundamental analysis methods (and I can go ahead and call him an expert in his field of action) that CAPM pricing model does not appeal to him. Almost verbatim quoting his words: "it is somehow vague and fuzzy."

The fuzzy systems - but understood very differently, because in terms of a formal Fuzzy Logic methodology - we'll be discussing with completely different occasions. But now, in order to advertise the issue, I will write just a handful of questions related to CAPM+Forex topic, which I hurled myself into the mouth.

  1. CAPM model applies to stock markets, where profit is achieved only as a result of an increase in stock prices. Can I move it to the derivatives market?
  2. What is the equivalent of the market portfolio? For the case of equity portfolios generally used are appropriate indices. Is there a market index for Forex?
  3. In this model, there is - as a parameter - the risk free rate of return. How do I specify it in the case of financial instruments of various nature and denominated in different currencies?

These questions are just the tip of the iceberg, what is the issue of the transfer of portfolio theory for the Forex market. I plan to drill down further into the icy rock. And because this is probably not the first approach to the subject, I await with curiosity voices in the discussion.

11 comments:

  1. Interesting questions... I was evaluating use CAPM at forex and found this post that mame me think a little more. Thanks

    ReplyDelete
  2. Hello, I also would like to comment over all the points mentioned in this blog. I agree with essence of few point but somewhere I found myself on other place. I hope, there might little opinion of others as well.
    Pending Order คืออะไร

    ReplyDelete
  3. written content. I added new knowledge to my database for essay writing skill.
    เรียน sat

    ReplyDelete
  4. Share great information about your blog , Blog really helpful for us . We read your blog , share most useful information in blog . Thanks for share your blog here .
    รถลาก

    ReplyDelete
  5. This blog is really helpful to deliver updated educational affairs over internet which is really appraisable. I found one successful example of this truth through this blog. I am going to use such information now.
    เต็นท์ คลุม รถ

    ReplyDelete
  6. Sometime few educational blogs become very helpful while getting relevant and new information related to your targeted area. As I found this blog and appreciate the information delivered to my database.
    led

    ReplyDelete
  7. Sometimes is becomes very hard to take appreciation for your hard work. But sometime only few technical point makes your work worthwhile. Suggestion under this blog is quite good.
    เทรด forex

    ReplyDelete
  8. That’s what I was looking for. I am talking about all topics bundled in this blog. They all are really very useful for me as well as for my team. We are definitely going to use its highlighted information.
    เทคนิค การ เทรด forex

    ReplyDelete
  9. Nice to read this publication on this blog. As far as I can see, this is a very basic question for everyone indeed. Its my personal opinion and I am completely agreed with the subject used here
    Bollinger Bands คือ

    ReplyDelete
  10. Nice post. I learn something new and challenging on blogs I stumbleupon on a daily basis. It's always helpful to read through articles from other writers and practice a little something from their web sites.
    tủ gỗ công nghiệp

    ReplyDelete
  11. An impressive share! I have just forwarded this onto a friend who was conducting a little homework on this. And he in fact ordered me lunch due to the fact that I found it for him... lol. So let me reword this.... Thanks for the meal!! But yeah, thanx for spending the time to talk about this subject here on your website.
    tủ quần áo gỗ công nghiệp

    ReplyDelete