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

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  • Momtchil Pojarliev

Abstract

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

Suggested Citation

  • Momtchil Pojarliev, 2005. "Performance of Currency Trading Strategies in Developed and Emerging Markets: Some Striking Differences," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 19(3), pages 297-311, October.
    • Handle: RePEc:kap:fmktpm:v:19:y:2005:i:3:p:297-311
    DOI: 10.1007/s11408-005-4692-2
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    References listed on IDEAS

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    1. LeBaron, Blake, 1999. "Technical trading rule profitability and foreign exchange intervention," Journal of International Economics, Elsevier, vol. 49(1), pages 125-143, October.
    2. repec:bla:reviec:v:9:y:2001:i:3:p:505-17 is not listed on IDEAS
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    6. Bansal, Ravi & Dahlquist, Magnus, 2000. "The forward premium puzzle: different tales from developed and emerging economies," Journal of International Economics, Elsevier, vol. 51(1), pages 115-144, June.
    7. CL Dunis & N Levy, 2002. "Do exotic currencies improve the risk-adjusted performance of dynamic currency overlays?," Journal of Asset Management, Palgrave Macmillan, vol. 2(4), pages 336-352, March.
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    Cited by:

    1. Ali Shehadeh & Peter Erdos & Youwei Li & Michael Moore, 2016. "US Dollar Carry Trades in the Era of "Cheap Money"," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 66(5), pages 374-404, October.
    2. Peltomäki, Jarkko, 2008. "Emerging market hedge funds and the yen carry trade," Emerging Markets Review, Elsevier, vol. 9(3), pages 220-229, September.
    3. Kuang, P. & Schröder, M. & Wang, Q., 2014. "Illusory profitability of technical analysis in emerging foreign exchange markets," International Journal of Forecasting, Elsevier, vol. 30(2), pages 192-205.
    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. Baillie, Richard T. & Chang, Sanders S., 2011. "Carry trades, momentum trading and the forward premium anomaly," Journal of Financial Markets, Elsevier, vol. 14(3), pages 441-464, August.
    6. Kuang, P. & Schröder, M. & Wang, Q., 2014. "Illusory profitability of technical analysis in emerging foreign exchange markets," International Journal of Forecasting, Elsevier, vol. 30(2), pages 192-205.
    7. Calice, Giovanni & Lin, Ming-Tsung, 2024. "Sovereign momentum currency returns," International Review of Financial Analysis, Elsevier, vol. 96(PB).
    8. Shehadeh, Ali & Li, Youwei & Moore, Michael, 2016. "The Forward Premium Bias, Carry Trade Return and the Risks of Volatility and Liquidity," MPRA Paper 71709, University Library of Munich, Germany.

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