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Performance of Currency Trading Strategies in Developed and Emerging Markets: Some Striking Differences

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  • Momtchil Pojarliev

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Abstract

Expanding the currency investment universe makes a lot of sense from a diversification point of view. Nevertheless, 60% of the total foreign exchange turnover is still only traded in three currency pairs (USD/EUR, USD/JPY and USD/GBP). The share of trading in local currencies in emerging markets is only around 5%. This can be explained by the fact that some currency managers fear investing in emerging market currencies. Many believe that political risk is the most dominant driver in these markets and that traditional investment rules do not work. In this paper, I apply four technical trading strategies for the developed market currencies and for the most traded emerging market currencies. The empirical results show some striking differences. They suggest that trend-following rules work better for emerging market currencies, while carry trading strategies perform better across developed market currencies. Nevertheless, it seems that conventional techniques could be successfully applied to both developed and emerging market currencies. I conclude that currency managers should not be afraid to diversify into emerging market currencies. They should, however, adjust their trading style accordingly. Copyright Swiss Society for Financial Market Research 2005

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File URL: http://hdl.handle.net/10.1007/s11408-005-4692-2
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Bibliographic Info

Article provided by Springer in its journal Financial Markets and Portfolio Management.

Volume (Year): 19 (2005)
Issue (Month): 3 (October)
Pages: 297-311

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Handle: RePEc:kap:fmktpm:v:19:y:2005:i:3:p:297-311

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Web page: http://www.springerlink.com/link.asp?id=119763

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  1. Bansal, Ravi & Dahlquist, Magnus, 2000. "The forward premium puzzle: different tales from developed and emerging economies," Journal of International Economics, Elsevier, vol. 51(1), pages 115-144, June.
  2. Blake LeBaron, . "Technical Trading Rule Profitability and Foreign Exchange Intervention," Working papers _002, University of Wisconsin - Madison.
  3. John F. O. Bilson, 1981. "The "Speculative Efficiency" Hypothesis," NBER Working Papers 0474, National Bureau of Economic Research, Inc.
  4. Frankel, Jeffrey A. & Rose, Andrew K., 1995. "Empirical research on nominal exchange rates," Handbook of International Economics, in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 33, pages 1689-1729 Elsevier.
  5. Gabriele Galati & Michael Melvin, 2004. "Why has FX trading surged?," BIS Quarterly Review, Bank for International Settlements, December.
  6. Alexius, Annika, 2001. "Uncovered Interest Parity Revisited," Review of International Economics, Wiley Blackwell, vol. 9(3), pages 505-17, August.
  7. Levich, Richard M. & Thomas, Lee III, 1993. "The significance of technical trading-rule profits in the foreign exchange market: a bootstrap approach," Journal of International Money and Finance, Elsevier, vol. 12(5), pages 451-474, October.
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Cited by:
  1. Peltomäki, Jarkko, 2008. "Emerging market hedge funds and the yen carry trade," Emerging Markets Review, Elsevier, vol. 9(3), pages 220-229, September.
  2. Kuang, P. & Schröder, M. & Wang, Q., 2014. "Illusory profitability of technical analysis in emerging foreign exchange markets," International Journal of Forecasting, Elsevier, vol. 30(2), pages 192-205.
  3. Baillie, Richard T. & Chang, Sanders S., 2011. "Carry trades, momentum trading and the forward premium anomaly," Journal of Financial Markets, Elsevier, vol. 14(3), pages 441-464, August.
  4. Tajaddini, Reza & Crack, Timothy Falcon, 2012. "Do momentum-based trading strategies work in emerging currency markets?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 22(3), pages 521-537.

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