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Combining Mean Reversion and Momentum Trading Strategies in Foreign Exchange Markets

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Listed author(s):
  • Alina Serban

    (Department of Economics, West Virginia University)

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    Abstract

    The literature on equity markets documents the existence of mean reversion and momentum phenomena. Researchers in foreign exchange markets find that foreign exchange rates also display behaviors akin to momentum and mean reversion. This paper implements a trading strategy combining mean reversion and momentum in foreign exchange markets. The strategy was originally designed for equity markets, but it also generates abnormal returns when applied to uncovered interest parity deviations for ten countries. I find that the pattern for the positions thus created in the foreign exchange markets is qualitatively similar to that found in the equity markets. Quantitatively, this strategy performs better in foreign exchange markets than in equity markets. Also, it outperforms traditional foreign exchange trading strategies, such as carry trades and moving average rules.

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    File URL: http://be.wvu.edu/phd_economics/pdf/09-14.pdf
    File Function: First version, 2009
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    Paper provided by Department of Economics, West Virginia University in its series Working Papers with number 09-14.

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    Length: 30 pages
    Date of creation: 2009
    Handle: RePEc:wvu:wpaper:09-14
    Contact details of provider: Postal:
    P.O. Box 6025, Morgantown, WV 26506-6025

    Phone: (304) 293-7859
    Fax: (304) 293-2233
    Web page: http://business.wvu.edu/graduate-degrees/phd-economics
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    Keywords: Uncovered Interest Parity; Mean Reversion; Momentum; Foreign Exchange; Trading Strategies.;

    Find related papers by JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

    This paper has been announced in the following NEP Reports:

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    Cited by:

    1. Ledenyov, Dimitri O. & Ledenyov, Viktor O., 2015. "Wave function method to forecast foreign currencies exchange rates at ultra high frequency electronic trading in foreign currencies exchange markets," MPRA Paper 67470, University Library of Munich, Germany.
    2. Akarim, Yasemin Deniz & Sevim, Serafettin, 2013. "The impact of mean reversion model on portfolio investment strategies: Empirical evidence from emerging markets," Economic Modelling, Elsevier, vol. 31(C), pages 453-459.

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