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Do momentum-based strategies work in emerging currency markets?

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Author Info

  • Chong, Terence Tai-Leung
  • Ip, Hugo Tak-Sang

Abstract

Existing studies on the profitability of trading rules in the currency market focus mainly on the currencies of developed countries. The profitability of technical trading rules on the currencies of emerging economies is surprisingly understudied. This paper evaluates the profitability of technical trading rules in emerging currency markets. Similar to Okunev and White [Okunev, J. and White, D., (2003) "Do Momentum-based Strategies Still Work in Foreign Currency Markets?" Journal of Financial and Quantitative Analysis 38, 425-447.], 354 long/short moving average rules for six currencies are investigated. It is found that investing in emerging currencies can generate a considerable annual return of over 20%, even after a 5% annual transaction cost is imposed. The trading-rule profits are relatively stable across the 20Â year sample period. Furthermore, the impact of financial crises on the trading-rule returns is also examined. It is found that the profitability of the trading rules is improved after the crises.

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Bibliographic Info

Article provided by Elsevier in its journal Pacific-Basin Finance Journal.

Volume (Year): 17 (2009)
Issue (Month): 4 (September)
Pages: 479-493

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Handle: RePEc:eee:pacfin:v:17:y:2009:i:4:p:479-493

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Web page: http://www.elsevier.com/locate/pacfin

Related research

Keywords: Emerging currencies Trading rules Information ratio;

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References

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  1. Sweeney, Richard J, 1986. " Beating the Foreign Exchange Market," Journal of Finance, American Finance Association, vol. 41(1), pages 163-82, March.
  2. Ratner, Mitchell & Leal, Ricardo P. C., 1999. "Tests of technical trading strategies in the emerging equity markets of Latin America and Asia," Journal of Banking & Finance, Elsevier, vol. 23(12), pages 1887-1905, December.
  3. Neely, Christopher J., 2002. "The temporal pattern of trading rule returns and exchange rate intervention: intervention does not generate technical trading profits," Journal of International Economics, Elsevier, vol. 58(1), pages 211-232, October.
  4. Chang, Eui Jung & Lima, Eduardo Jose Araujo & Tabak, Benjamin Miranda, 2004. "Testing for predictability in emerging equity markets," Emerging Markets Review, Elsevier, vol. 5(3), pages 295-316, September.
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  7. William N. Goetzmann & Evan Geov Gatev & K. Geert Rouwenhorst, 1998. "Pairs Trading: Performance of a Relative Value Arbitrage Rule," Yale School of Management Working Papers ysm109, Yale School of Management.
  8. Burnside, A Craig & Eichenbaum, Martin & Rebelo, Sérgio, 2007. "The Returns to Currency Speculation in Emerging Markets," CEPR Discussion Papers 6148, C.E.P.R. Discussion Papers.
  9. Okunev, John & White, Derek, 2003. "Do Momentum-Based Strategies Still Work in Foreign Currency Markets?," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 38(02), pages 425-447, June.
  10. Stanley Fischer, 2001. "Exchange Rate Regimes: Is the Bipolar View Correct?," Journal of Economic Perspectives, American Economic Association, vol. 15(2), pages 3-24, Spring.
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  12. Su, Qian & Chong, Terence Tai-Leung, 2007. "Determining the contributions to price discovery for Chinese cross-listed stocks," Pacific-Basin Finance Journal, Elsevier, vol. 15(2), pages 140-153, April.
  13. Szakmary, Andrew C. & Mathur, Ike, 1997. "Central bank intervention and trading rule profits in foreign exchange markets," Journal of International Money and Finance, Elsevier, vol. 16(4), pages 513-535, August.
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  15. Lee, Chun I. & Pan, Ming-Shiun & Liu, Y. Angela, 2001. "On market efficiency of Asian foreign exchange rates: evidence from a joint variance ratio test and technical trading rules," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 11(2), pages 199-214, June.
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  17. Gunasekarage, Abeyratna & Power, David M., 2001. "The profitability of moving average trading rules in South Asian stock markets," Emerging Markets Review, Elsevier, vol. 2(1), pages 17-33, March.
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Citations

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Cited by:
  1. Chong, Terence Tai-Leung & Lam, Tau-Hing & Yan, Isabel Kit-Ming, 2012. "Is the Chinese stock market really inefficient?," China Economic Review, Elsevier, vol. 23(1), pages 122-137.
  2. Truong, Cameron, 2010. "Post earnings announcement drift and the roles of drift-enhanced factors in New Zealand," Pacific-Basin Finance Journal, Elsevier, vol. 18(2), pages 139-157, April.
  3. William Wai Him Tsang & Terence Tai Leung Chong, 2009. "Profitability of the On-Balance Volume Indicator," Economics Bulletin, AccessEcon, vol. 29(3), pages 2424-2431.

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