Do momentum-based strategies work in emerging currency markets?

Abstract

Existing studies on the profitability of trading rules in the currency market focus mainly on the currencies of developed countries. The profitability of technical trading rules on the currencies of emerging economies is surprisingly understudied. This paper evaluates the profitability of technical trading rules in emerging currency markets. Similar to Okunev and White [Okunev, J. and White, D., (2003) “Do Momentum-based Strategies Still Work in Foreign Currency Markets?” Journal of Financial and Quantitative Analysis 38, 425–447.], 354 long/short moving average rules for six currencies are investigated. It is found that investing in emerging currencies can generate a considerable annual return of over 20%, even after a 5% annual transaction cost is imposed. The trading-rule profits are relatively stable across the 20 year sample period. Furthermore, the impact of financial crises on the trading-rule returns is also examined. It is found that the profitability of the trading rules is improved after the crises.