Jump-Only Momentum and Reversal in Currency Markets

51 Pages Posted: 1 Jan 2020

See all articles by Yunhao He

Yunhao He

University of Zurich; Swiss Finance Institute

Date Written: November 26, 2019

Abstract

This paper investigates the momentum and reversal signals in exchange rate jumps in currency markets. Following exchange rate jumps, currencies from emerging markets appreciate, but currencies from developed economies depreciate. Stepwise multiple testing confirms non-jump exchange rate changes signal neither momentum nor reversal. I construct strategies based on exchange rate jumps only, which perform better than pure momentum or reversal strategies with Sharpe ratios exceeding one. Returns of such strategies are robust out-of-sample and after transaction costs. A panel regression of aggregated jump sizes on macroeconomic factors suggests that exchange rate jumps in emerging markets are related to the country's GDP, while those in developed countries are explained by trade with the US.

Keywords: foreign currency, jump-modified momentum and reversal

JEL Classification: F31, G15, C14

Suggested Citation

He, Yunhao, Jump-Only Momentum and Reversal in Currency Markets (November 26, 2019). Available at SSRN: https://ssrn.com/abstract=3493732 or http://dx.doi.org/10.2139/ssrn.3493732

Yunhao He (Contact Author)

University of Zurich ( email )

Rämistrasse 71
Zürich, CH-8006
Switzerland

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

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