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A Simple Test of Momentum in Foreign Exchange Markets

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  • Andrés Felipe García-Suaza

    ()

  • Jose Eduardo Gómez González

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Abstract

This study proposes a new method for testing for the presence of momentum in nominal exchange rates, using a probabilistic approach. We illustrate our methodology estimating a binary response model using information on local currency / US dollar exchange rates of eight emerging economies. After controlling for important variables affecting the behavior of exchange rates in the short-run, we show evidence of exchange rate inertia; in other words, we find that exchange rate momentum is a common feature in this group of emerging economies, and thus foreign exchange traders participating in these markets are able to make excess returns by following technical analysis strategies. We find that the presence of momentum is asymmetric, being stronger in moments of currency depreciation than of appreciation. This behavior may be associated with central bank intervention.

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Paper provided by Banco de la Republica de Colombia in its series Borradores de Economia with number 647.

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Handle: RePEc:bdr:borrec:647

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Keywords: Momentum; foreign exchange markets; hazard duration analysis; emerging economies. Classification JEL: G14; G15; C41.;

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  1. Taylor, Mark P. & Allen, Helen, 1992. "The use of technical analysis in the foreign exchange market," Journal of International Money and Finance, Elsevier, Elsevier, vol. 11(3), pages 304-314, June.
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  5. Michel Beine & Jér�me Lahaye & Sébastien Laurent & Christopher J. Neely & Franz C. Palm, 2007. "Central bank intervention and exchange rate volatility, its continuous and jump components," International Journal of Finance & Economics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 12(2), pages 201-223.
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  19. Michael Sager & Mark P. Taylor, 2008. "Commercially Available Order Flow Data and Exchange Rate Movements: "Caveat Emptor"," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 40(4), pages 583-625, 06.
  20. Tigran Poghosyan & Evžen Kočenda & Petr Zemčik, 2008. "Modeling Foreign Exchange Risk Premium in Armenia," Emerging Markets Finance and Trade, M.E. Sharpe, Inc., M.E. Sharpe, Inc., vol. 44(1), pages 41-61, January.
  21. Luis Muga & Rafael Santamaría, 2007. "The Momentum Effect in Latin American Emerging Markets," Emerging Markets Finance and Trade, M.E. Sharpe, Inc., M.E. Sharpe, Inc., vol. 43(4), pages 24-45, August.
  22. Hakan Kara & Fethi Öğünç, 2008. "Inflation Targeting and Exchange Rate Pass-Through: The Turkish Experience," Emerging Markets Finance and Trade, M.E. Sharpe, Inc., M.E. Sharpe, Inc., vol. 44(6), pages 52-66, November.
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