In this paper, I study the patterns of hedge fund herding in currency future contracts and find evidence that hedge funds herd. High-interest (low-interest) currencies have higher buy-side (sell-side) herding consistent with carry trade positions. I then propose a strategy herding measure that I use to track hedge fund herding in the carry trade strategy. I find that hedge fund carry trade strategy herding positively predicts future returns, a result that is robust to a host of other measures of activity. I find no that hedge fund herding is destabilizing, and investors can improve performance by following hedge fund herding behavior in the carry trade.

The profitability of technical analysis strategies seriously challenges weak-form market efficiency. An important, unanswered question is why these profit opportunities are not arbitraged away by rational investors. This study tests whether arbitrage risk in the form of limits to arbitrage (LTA) and investor sentiment explain the returns to technical analysis strategies. I find that seven proxies for LTA are positively related to returns to[AH1]  technical analysis portfolios, based on a large set of technical trading rules for six major currencies. However, higher levels of investor sentiment are unrelated to higher returns to technical analysis, contrasting the literature on stock market anomalies and practitioner belief. The main takeaway is that LTA are an important determinant of technical analysis profitability.

This paper applies the gradual information diffusion hypothesis, which suggests that information spreads gradually across asset markets, leading to cross-asset return predictability, to explain the role of speculator activity in the cross-asset return predictability of foreign exchange (FX) market strategies. We argue that the activity of speculators should increase the rate of information diffusion across asset markets. Hence, we expect the predictability from of the equity and commodity markets to predict the FX market would to be weaker when speculators are active in the FX market. Our results show that, when speculator activity is high, predictability from the equity market’s ability  to predict the FX market dissipates, but not to the same extent as for the commodity market. Our findings suggest that speculators play a vital role in enhancing informational efficiency in the FX market.

This paper examines the impact of investor attention on stock market and FX market volatility in emerging economies using newly constructed innovative attention proxies that capture the full spectrum of the dynamics of the information processing stages. Our results show that the new practical proxies are better at capturing the complex nature of investor attention to market categories. We find that investor attention explains stock market volatility and shocks to attention but not FX market volatility in emerging markets. Thus, the emerging stock market, an important segment of the global equity market, is particularly sensitive to changes to investor attention.