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

  • Momtchil Pojarliev

    ()

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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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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  1. Blake LeBaron, 1996. "Technical Trading Rule Profitability and Foreign Exchange Intervention," NBER Working Papers 5505, National Bureau of Economic Research, Inc.
  2. Alexius, Annika, 2001. "Uncovered Interest Parity Revisited," Review of International Economics, Wiley Blackwell, vol. 9(3), pages 505-17, August.
  3. Bilson, John F O, 1981. "The "Speculative Efficiency" Hypothesis," The Journal of Business, University of Chicago Press, vol. 54(3), pages 435-51, July.
  4. Gabriele Galati & Michael Melvin, 2004. "Why has FX trading surged?," BIS Quarterly Review, Bank for International Settlements, December.
  5. Bansal, Ravi & Dahlquist, Magnus, 1999. "The Forward Premium Puzzle: Different Tales from Developed and Emerging Economies," CEPR Discussion Papers 2169, C.E.P.R. Discussion Papers.
  6. 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.
  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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