Computational Economics

, Volume 33, Issue 2, pp 131–154 | Cite as

Measuring the Efficiency of the Intraday Forex Market with a Universal Data Compression Algorithm

  • Armin Shmilovici
  • Yoav Kahiri
  • Irad Ben-Gal
  • Shmuel Hauser
Article

Abstract

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.

Keywords

Efficient Market Hypothesis Universal prediction Forex Intra-day trading Variable Order Markov 

JEL Classification

G14 C22 C53 C49 C63 

Mathematics Subject Classification (2000)

62P05 91B84 62M20 

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Copyright information

© Springer Science+Business Media, LLC. 2008

Authors and Affiliations

  • Armin Shmilovici
    • 1
  • Yoav Kahiri
    • 2
  • Irad Ben-Gal
    • 3
  • Shmuel Hauser
    • 4
  1. 1.Department of Information SystemsBen-Gurion UniversityBeer-ShevaIsrael
  2. 2.School of ManagementBen-Gurion UniversityBeer-ShevaIsrael
  3. 3.Department of Industrial EngineeringTel-Aviv UniversityRamat-Aviv, Tel-AvivIsrael
  4. 4.ONO Academic College and School of ManagementBen-Gurion UniversityBeer-ShevaIsrael

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