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A Simple Test of Momentum in Foreign Exchange Markets

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  • Andres Felipe Garcia-Suaza

    ()

  • Jose Eduardo Gómez

    ()

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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Bibliographic Info

Paper provided by BANCO DE LA REPÚBLICA in its series BORRADORES DE ECONOMIA with number 008230.

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Length: 20
Date of creation: 28 Mar 2011
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Handle: RePEc:col:000094:008230

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Keywords: Momentum; foreign exchange markets; hazard duration analysis; emerging economies;

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