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A test of momentum trading strategies in foreign exchange markets: evidence from the G7

Author

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  • Robert J. Bianchi
  • Michael E. Drew
  • John Polichronis

Abstract

In this trading strategy study, we ask three questions: does momentum exist in foreign exchange markets? What is the impact of transaction costs on excess returns? Can a consolidated trading signal garner excess returns and if so, what is the source of such returns? Using total return momentum strategies in the foreign exchange markets of the G7 for the period 1980 through 2004, the answers from this study are as follows: we find evidence of momentum; however, such momentum appears transitory, particularly for longer lookback periods. As expected, transaction costs have a material negative impact on excess returns. Finally, a consolidated signal garners excess returns; however, a bootstrap simulation finds that the source of these returns is a function of autocorrelation.

Suggested Citation

  • Robert J. Bianchi & Michael E. Drew & John Polichronis, 2005. "A test of momentum trading strategies in foreign exchange markets: evidence from the G7," Global Business and Economics Review, Inderscience Enterprises Ltd, vol. 7(2/3), pages 155-179.
    • Handle: RePEc:ids:gbusec:v:7:y:2005:i:2/3:p:155-179
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    Citations

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    Cited by:

    1. Adam Zaremba & Jacob Koby Shemer, 2018. "Price-Based Investment Strategies," Springer Books, Springer, number 978-3-319-91530-2, June.
    2. Jordan Mann & J. Nathan Kutz, 2016. "Dynamic mode decomposition for financial trading strategies," Quantitative Finance, Taylor & Francis Journals, vol. 16(11), pages 1643-1655, November.
    3. Crossland, Jarrod & Li, Bin & Roca, Eduardo, 2013. "Is the European Union Emissions Trading Scheme (EU ETS) informationally efficient? Evidence from momentum-based trading strategies," Applied Energy, Elsevier, vol. 109(C), pages 10-23.

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