IDEAS home Printed from https://ideas.repec.org/a/eee/intfin/v38y2015icp217-229.html
   My bibliography  Save this article

Is Exchange Rate Trading Profitable?

Author

Listed:
  • Narayan, Paresh Kumar
  • Mishra, Sagarika
  • Narayan, Seema
  • Thuraisamy, Kannan

Abstract

We test whether exchange rate trading is profitable in the emerging markets of Brazil, China, India, and South Africa. Using momentum trading strategies applied to high frequency data, we discover that: (a) momentum-based trading strategies lead to statistically significant profits from the currencies of all four emerging markets; (b) the South African Rand is generally the most profitable, followed by the Brazilian Real and the Indian Rupee; (c) profits are persistent during the day and are trading frequency dependent; and (d) during the period of the global financial crisis currency profits were maximised.

Suggested Citation

  • Narayan, Paresh Kumar & Mishra, Sagarika & Narayan, Seema & Thuraisamy, Kannan, 2015. "Is Exchange Rate Trading Profitable?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 38(C), pages 217-229.
    • Handle: RePEc:eee:intfin:v:38:y:2015:i:c:p:217-229
    DOI: 10.1016/j.intfin.2015.05.015
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S1042443115000682
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.intfin.2015.05.015?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Dominguez, Kathryn M.E. & Hashimoto, Yuko & Ito, Takatoshi, 2012. "International reserves and the global financial crisis," Journal of International Economics, Elsevier, vol. 88(2), pages 388-406.
    2. Sweeney, Richard J, 1986. "Beating the Foreign Exchange Market," Journal of Finance, American Finance Association, vol. 41(1), pages 163-182, March.
    3. Lee, Chun I. & Mathur, Ike, 1996. "Trading rule profits in european currency spot cross-rates," Journal of Banking & Finance, Elsevier, vol. 20(5), pages 949-962, June.
    4. Mahendra Raj, 2000. "Transactions data tests of efficiency: An investigation in the Singapore futures markets," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 20(7), pages 687-704, August.
    5. Ratner, Mitchell & Leal, Ricardo P. C., 1999. "Tests of technical trading strategies in the emerging equity markets of Latin America and Asia," Journal of Banking & Finance, Elsevier, vol. 23(12), pages 1887-1905, December.
    6. Neely, Christopher & Weller, Paul & Dittmar, Rob, 1997. "Is Technical Analysis in the Foreign Exchange Market Profitable? A Genetic Programming Approach," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 32(4), pages 405-426, December.
    7. LeBaron, Blake, 1999. "Technical trading rule profitability and foreign exchange intervention," Journal of International Economics, Elsevier, vol. 49(1), pages 125-143, October.
    8. Dobson, Wendy & Masson, Paul R., 2009. "Will the renminbi become a world currency?," China Economic Review, Elsevier, vol. 20(1), pages 124-135, March.
    9. C. I. Lee & I. Mathur, 1996. "A comprehensive look at the efficacy of technical trading rules applied to cross-rates," The European Journal of Finance, Taylor & Francis Journals, vol. 2(4), pages 389-411.
    10. Harris, Richard D.F. & Yilmaz, Fatih, 2009. "A momentum trading strategy based on the low frequency component of the exchange rate," Journal of Banking & Finance, Elsevier, vol. 33(9), pages 1575-1585, September.
    11. Okunev, John & White, Derek, 2003. "Do Momentum-Based Strategies Still Work in Foreign Currency Markets?," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 38(2), pages 425-447, June.
    12. Ramazan GenÁay & Giuseppe Ballocchi & Michel Dacorogna & Richard Olsen & Olivier Pictet, 2002. "Real-Time Trading Models and the Statistical Properties of Foreign Exchange Rates," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 43(2), pages 463-492, May.
    13. Szakmary, Andrew C. & Mathur, Ike, 1997. "Central bank intervention and trading rule profits in foreign exchange markets," Journal of International Money and Finance, Elsevier, vol. 16(4), pages 513-535, August.
    14. Lee, Chun I. & Pan, Ming-Shiun & Liu, Y. Angela, 2001. "On market efficiency of Asian foreign exchange rates: evidence from a joint variance ratio test and technical trading rules," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 11(2), pages 199-214, June.
    15. Olson, Dennis, 2004. "Have trading rule profits in the currency markets declined over time?," Journal of Banking & Finance, Elsevier, vol. 28(1), pages 85-105, January.
    16. Yin-Wong Cheung & Clement Yuk-Pang Wong, 1997. "The Performance of Trading Rules on Four Asian Currency Exchange Rates," Multinational Finance Journal, Multinational Finance Journal, vol. 1(1), pages 1-22, March.
    17. Neely, C. J. & Weller, P. A., 2003. "Intraday technical trading in the foreign exchange market," Journal of International Money and Finance, Elsevier, vol. 22(2), pages 223-237, April.
    18. 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.
    19. Gabriele Galati & Alexandra Heath & Patrick McGuire, 2007. "Evidence of carry trade activity," BIS Quarterly Review, Bank for International Settlements, September.
    20. Dr. Shakill Hassan & Sean Smith, 2011. "The Rand as a Carry Trade Target Risk Returns and Policy Implications," Working Papers 4878, South African Reserve Bank.
    21. Ammer, John & Brunner, Allan D., 1997. "Are banks market timers or market makers? Explaining foreign exchange trading profits," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 7(1), pages 43-60, April.
    22. Manahov, Viktor & Hudson, Robert & Gebka, Bartosz, 2014. "Does high frequency trading affect technical analysis and market efficiency? And if so, how?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 28(C), pages 131-157.
    23. Gencay, Ramazan & Dacorogna, Michel & Olsen, Richard & Pictet, Olivier, 2003. "Foreign exchange trading models and market behavior," Journal of Economic Dynamics and Control, Elsevier, vol. 27(6), pages 909-935, April.
    24. Gyntelberg, Jacob & Loretan, Mico & Subhanij, Tientip & Chan, Eric, 2014. "Exchange rate fluctuations and international portfolio rebalancing," Emerging Markets Review, Elsevier, vol. 18(C), pages 34-44.
    25. Narasimhan Jegadeesh & Sheridan Titman, 2001. "Profitability of Momentum Strategies: An Evaluation of Alternative Explanations," Journal of Finance, American Finance Association, vol. 56(2), pages 699-720, April.
    26. Lan, Li-Huei & Chen, Chang-Chih & Chuang, Shuang-Shii, 2015. "Exchange rate risk management: What can we learn from financial crises?," Economic Modelling, Elsevier, vol. 45(C), pages 187-192.
    27. Jegadeesh, Narasimhan & Titman, Sheridan, 1993. "Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency," Journal of Finance, American Finance Association, vol. 48(1), pages 65-91, March.
    28. Brock, William & Lakonishok, Josef & LeBaron, Blake, 1992. "Simple Technical Trading Rules and the Stochastic Properties of Stock Returns," Journal of Finance, American Finance Association, vol. 47(5), pages 1731-1764, December.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. El Ouadghiri, Imane & Uctum, Remzi, 2016. "Jumps in equilibrium prices and asymmetric news in foreign exchange markets," Economic Modelling, Elsevier, vol. 54(C), pages 218-234.
    2. Siroos Khademalomoom & Paresh Kumar Narayan & Susan Sunila Sharma, 2019. "Higher Moments and Exchange Rate Behavior," The Financial Review, Eastern Finance Association, vol. 54(1), pages 201-229, February.
    3. Tsuji, Chikashi, 2020. "Correlation and spillover effects between the US and international banking sectors: New evidence and implications for risk management," International Review of Financial Analysis, Elsevier, vol. 70(C).
    4. Hudson, Robert & McGroarty, Frank & Urquhart, Andrew, 2017. "Sampling frequency and the performance of different types of technical trading rules," Finance Research Letters, Elsevier, vol. 22(C), pages 136-139.
    5. Khademalomoom, Siroos & Narayan, Paresh Kumar, 2020. "Intraday-of-the-week effects: What do the exchange rate data tell us?," Emerging Markets Review, Elsevier, vol. 43(C).
    6. Xiaoye Jin, 2022. "Evaluating the predictive power of intraday technical trading in China's crude oil market," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 41(7), pages 1416-1432, November.
    7. Jin, Xiaoye, 2022. "Performance of intraday technical trading in China’s gold market," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 76(C).
    8. Wang, Lu & Ma, Feng & Niu, Tianjiao & He, Chengting, 2020. "Crude oil and BRICS stock markets under extreme shocks: New evidence," Economic Modelling, Elsevier, vol. 86(C), pages 54-68.
    9. Urquhart, Andrew & Zhang, Hanxiong, 2019. "The performance of technical trading rules in Socially Responsible Investments," International Review of Economics & Finance, Elsevier, vol. 63(C), pages 397-411.
    10. Batten, Jonathan A. & Lucey, Brian M. & McGroarty, Frank & Peat, Maurice & Urquhart, Andrew, 2018. "Does intraday technical trading have predictive power in precious metal markets?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 52(C), pages 102-113.
    11. Kilic, Erdem, 2017. "Contagion effects of U.S. Dollar and Chinese Yuan in forward and spot foreign exchange markets," Economic Modelling, Elsevier, vol. 62(C), pages 51-67.
    12. Dockery, Everton & Todorov, Ivan, 2023. "Further evidence on the returns to technical trading rules: Insights from fourteen currencies," Journal of Multinational Financial Management, Elsevier, vol. 69(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Christopher J. Neely & Paul A. Weller, 2011. "Technical analysis in the foreign exchange market," Working Papers 2011-001, Federal Reserve Bank of St. Louis.
    2. Lukas Menkhoff & Mark P. Taylor, 2007. "The Obstinate Passion of Foreign Exchange Professionals: Technical Analysis," Journal of Economic Literature, American Economic Association, vol. 45(4), pages 936-972, December.
    3. Siroos Khademalomoom & Paresh Kumar Narayan & Susan Sunila Sharma, 2019. "Higher Moments and Exchange Rate Behavior," The Financial Review, Eastern Finance Association, vol. 54(1), pages 201-229, February.
    4. Tajaddini, Reza & Crack, Timothy Falcon, 2012. "Do momentum-based trading strategies work in emerging currency markets?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 22(3), pages 521-537.
    5. Cheol‐Ho Park & Scott H. Irwin, 2007. "What Do We Know About The Profitability Of Technical Analysis?," Journal of Economic Surveys, Wiley Blackwell, vol. 21(4), pages 786-826, September.
    6. Dockery, Everton & Todorov, Ivan, 2023. "Further evidence on the returns to technical trading rules: Insights from fourteen currencies," Journal of Multinational Financial Management, Elsevier, vol. 69(C).
    7. Shynkevich, Andrei, 2012. "Performance of technical analysis in growth and small cap segments of the US equity market," Journal of Banking & Finance, Elsevier, vol. 36(1), pages 193-208.
    8. Harris, Richard D.F. & Yilmaz, Fatih, 2009. "A momentum trading strategy based on the low frequency component of the exchange rate," Journal of Banking & Finance, Elsevier, vol. 33(9), pages 1575-1585, September.
    9. Lee, Chun I & Gleason, Kimberly C. & Mathur, Ike, 2001. "Trading rule profits in Latin American currency spot rates," International Review of Financial Analysis, Elsevier, vol. 10(2), pages 135-156.
    10. Neely, Christopher J. & Weller, Paul A., 2013. "Lessons from the evolution of foreign exchange trading strategies," Journal of Banking & Finance, Elsevier, vol. 37(10), pages 3783-3798.
    11. Manahov, Viktor & Hudson, Robert & Gebka, Bartosz, 2014. "Does high frequency trading affect technical analysis and market efficiency? And if so, how?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 28(C), pages 131-157.
    12. Chong, Terence Tai-Leung & Ip, Hugo Tak-Sang, 2009. "Do momentum-based strategies work in emerging currency markets?," Pacific-Basin Finance Journal, Elsevier, vol. 17(4), pages 479-493, September.
    13. Walid Omrane & Hervé Oppens, 2006. "The performance analysis of chart patterns: Monte Carlo simulation and evidence from the euro/dollar foreign exchange market," Empirical Economics, Springer, vol. 30(4), pages 947-971, January.
    14. Tabak, Benjamin M. & Lima, Eduardo J.A., 2009. "Market efficiency of Brazilian exchange rate: Evidence from variance ratio statistics and technical trading rules," European Journal of Operational Research, Elsevier, vol. 194(3), pages 814-820, May.
    15. Menkhoff, Lukas & Sarno, Lucio & Schmeling, Maik & Schrimpf, Andreas, 2012. "Currency momentum strategies," Journal of Financial Economics, Elsevier, vol. 106(3), pages 660-684.
    16. Olson, Dennis, 2004. "Have trading rule profits in the currency markets declined over time?," Journal of Banking & Finance, Elsevier, vol. 28(1), pages 85-105, January.
    17. Maxime Charlebois & Stephen Sapp, 2007. "Temporal Patterns in Foreign Exchange Returns and Options," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(2‐3), pages 443-470, March.
    18. Osman Kilic & Joseph M. Marks & Kiseok Nam, 2022. "Predictable asset price dynamics, risk-return tradeoff, and investor behavior," Review of Quantitative Finance and Accounting, Springer, vol. 59(2), pages 749-791, August.
    19. Balvers, Ronald & Wu, Yangru, 2010. "Optimal transaction filters under transitory trading opportunities: Theory and empirical illustration," Journal of Financial Markets, Elsevier, vol. 13(1), pages 129-156, February.
    20. Dueker, Michael & Neely, Christopher J., 2007. "Can Markov switching models predict excess foreign exchange returns?," Journal of Banking & Finance, Elsevier, vol. 31(2), pages 279-296, February.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:intfin:v:38:y:2015:i:c:p:217-229. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/intfin .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.