CeDEx workshop - Mike Bleaney (Nottingham)

Testing Behavioural Theories in the Foreign Exchange Market

After a run of heads in a toss of a fair coin, experimental evidence suggests that people anticipate another head after a long run, but a tail after a short run.  Gamblers in the casino show the opposite tendency (betting on black after a run of red wins at roulette).   We use tick-by-tick data from the foreign exchange market.  Results are consistent with those from the casino: there are more sales than purchases of a rising currency if it has risen for more than one trade.  We also show that signal strength (the speed of rise) has similar effects to streak length (the number of trades for which it has risen).