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Momentum and Trend Following Trading Strategies for Currencies Revisited - Combining Academia and Industry

22 Pages Posted: 11 Apr 2017 Last revised: 7 Jun 2017

Janick Rohrbach

Zurich University of Applied Sciences

Silvan Suremann

Zurich University of Applied Sciences

Joerg Osterrieder

Zurich University of Applied Sciences

Date Written: June 6, 2017

Abstract

Momentum trading strategies are thoroughly described in the academic literature and used in many trading strategies by hedge funds, asset managers, and proprietary traders. Baz et al. (2015) describe a momentum strategy for different asset classes in great detail from a practitioner’s point of view. Using a geometric Brownian Motion for the dynamics of the returns of financial instruments, we extensively explain the motivation and background behind each step of a momentum trading strategy. Constants and parameters that are used for the practical implementation are derived in a theoretical setting and deviations from those used in Baz et al. (2015) are shown. The trading signal is computed as a mixture of exponential moving averages with different time horizons. We give a statistical justification for the optimal selection of time horizons. Furthermore, we test our approach on global currency markets, including G10 currencies, emerging market currencies, and cryptocurrencies. Both a time series portfolio and a cross-sectional portfolio are considered. We find that the strategy works best for traditional fiat currencies when considering a time series based momentum strategy. For cryptocurrencies, a cross-sectional approach is more suitable. The momentum strategy exhibits higher Sharpe ratios for more volatile currencies. Thus, emerging market currencies and cryptocurrencies have better performances than the G10 currencies. This is the first comprehensive study showing both the underlying statistical reasons of how such trading strategies are constructed in the industry as well as empirical results using a large universe of currencies, including cryptocurrencies.

Keywords: Momentum, Currency Markets, G10, Emerging Markets, Cryptocurrencies, Bitcoin, Moving Average Crossover, Cross-Sectional Momentum, Time Series Momentum, Trend-Following

JEL Classification: C40, C50, G00, G10, G15, G17, F17, F30, F31, F32

Suggested Citation

Rohrbach, Janick and Suremann, Silvan and Osterrieder, Joerg, Momentum and Trend Following Trading Strategies for Currencies Revisited - Combining Academia and Industry (June 6, 2017). Available at SSRN: https://ssrn.com/abstract=2949379 or http://dx.doi.org/10.2139/ssrn.2949379

Janick Rohrbach (Contact Author)

Zurich University of Applied Sciences ( email )

Winterthur, 8401
Switzerland

HOME PAGE: http://www.zhaw.ch

Silvan Suremann

Zurich University of Applied Sciences ( email )

Winterthur, CH 8401
Switzerland

HOME PAGE: http://www.zhaw.ch

Joerg Osterrieder

Zurich University of Applied Sciences ( email )

School of Engineering
Technikumstrasse 9
Winterthur, 8401
Switzerland

HOME PAGE: http://www.zhaw.ch

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