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Do Momentum Based Strategies Still Work in Foreign Currency Markets?

57 Pages Posted: 1 Jun 2001  

Derek R. White

UNSW Australia Business School, School of Banking and Finance

John Okunev

Coda Asset Management

Date Written: March 2001

Abstract

This paper examines the performance of momentum trading strategies in foreign exchange markets. We find the well-documented profitability of momentum strategies with equities to hold for currencies as well and to have continued throughout the 1980s and the 1990s. Our results indicate that the long/short strategy of buying the most attractive currency and shorting the least attractive currency obtains average excess returns that are significantly positive. Of particular note, the profitability to momentum strategies in foreign exchange markets has been particularly strong during the latter half of the 1990s. By examining 354 long/short moving average rules across eight currencies, we show the results are insensitive to the specification of the trading rule and the base currency for analysis. We also show that the correlations of the long/short momentum strategies using differing base currencies are very high - typically around 0.90. This would indicate that strong/weak momentum currencies relative to a base currency at a particular time are typically also strong/weak currencies relative to most other base currencies as well. Finally, using a bootstrap methodology we show that the performance is not due to a time-varying risk premium but depends on the underlying autocorrelation structure of the currency returns. In sum, the results lend further support to prior momentum studies on equities. The profitability to momentum-based strategies holds for currencies as well.

Keywords: Momentum, technical trading rules, GARCH, foreign exchange, bootstrap

JEL Classification: F31, G11, G15

Suggested Citation

White, Derek R. and Okunev, John, Do Momentum Based Strategies Still Work in Foreign Currency Markets? (March 2001). Available at SSRN: https://ssrn.com/abstract=264574 or http://dx.doi.org/10.2139/ssrn.264574

Derek White (Contact Author)

UNSW Australia Business School, School of Banking and Finance ( email )

Sydney, NSW 2052
Australia
+61 2 9385 5850 (Phone)
+61 2 9385 6347 (Fax)

John Okunev

Coda Asset Management ( email )

10 Arnold St
Queens park
Sydney, 2022
Australia
+61266744575 (Phone)

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