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Currency momentum strategies based on the Chinese Yuan: Timing of foreign exchange volatility

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  • Hsu, Ching-Chi
  • Chen, Miao-Ling

Abstract

This study provides an empirical investigation of currency momentum strategies traded on the Chinese Yuan (RMB). Using a cross trading strategy, we find that the RMB-based currency momentum (RCMOM) strategies are profitable and yield excess returns of up to 5% per annum (p.a.). The results are robust to risk adjustment and sub-periods analysis. We further calculate the foreign exchange volatility to explain the profits of RCMOM strategies. Our evidence shows that increased foreign exchange volatility is associated with higher RCMOM profits, and the strategies are more profitable with high volatility of the Chinese stock market. Considering the influence of Chinese market states in foreign exchange volatility, the RCMOM returns are insignificant. Our results suggest that the impact of foreign exchange risk is correlated to China’s market states.

Suggested Citation

  • Hsu, Ching-Chi & Chen, Miao-Ling, 2021. "Currency momentum strategies based on the Chinese Yuan: Timing of foreign exchange volatility," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 72(C).
    • Handle: RePEc:eee:intfin:v:72:y:2021:i:c:s1042443121000342
    DOI: 10.1016/j.intfin.2021.101315
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    More about this item

    Keywords

    RMB-based currency momentum strategy; Foreign exchange volatility; Market states;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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