Studies on currency markets: market anomalies and transaction privacy

This dissertation presents three essays that examine market anomalies in foreign exchange markets and the role of transaction anonymity in cryptocurrency markets. 

The first study shows that forward premiums are significant predictors of innovations in currency spot rates, and currency forward rates lead to price discovery during normal trading periods. Conversely, currency spot rates lead to price discovery during volatile periods. This finding is linked to investors’ overreaction to information, which in turn induces jumps in the currency spot rate; positive jumps weaken the contribution of the forward rate to price discovery and their informational efficiency. Further the analysis shows that the forward premium puzzle is linked to jump-driven pricing inefficiencies. 

In the second study a Trailing Contextual Anomaly Detection (TCAD) model to detect abnormal movements in the WM/Reuters foreign exchange benchmark setting windows is developed. Exploiting the high levels of correlation among time series, I show that the TCAD model outperforms ARIMA, Jump Test, and CAD methods in distinguishing the idiosyncratic cross-sectional anomalies that are indicative of market inefficiency. I find that adjusting for intraday seasonality improves the performance of the models predictive power of market close manipulation. I also quantify and identify abnormal fix movements as high impact events and characterise market inefficiency in the London 4pm fix.

In the third study, I argue that transaction anonymity affects cryptocurrency users’ decisions to accept a cryptocurrency. Cryptocurrencies operate based on cryptography which aims to ensure secure and private communications, but private information such as user identities are still exposed to violation. Due to the privacy threats, a number of cryptocurrencies that aim to improve privacy protection emerge, those cryptocurrencies are known as privacy coins. This dissertation assumes that transaction anonymity is very important for certain users such as criminals. Based on this assumption, this dissertation shows that privacy coins have a faster increase in acceptance compared with acceptance of other coins, and privacy coins have an increase in usage relative to usage of other coins when regulations that aim to address illegal uses of cryptocurrencies take place. Those findings imply that privacy is an important consideration for cryptocurrency users.