A Simple Test of Momentum in Foreign Exchange Markets

Citation data:

Banco de la Republica de Colombia, Borradores de Economia, No: 647

Publication Year:
2011
Repository URL:
http://repository.urosario.edu.co/handle/10336/10984; http://repositorio.banrep.gov.co/handle/20.500.12134/5664
RePec URLs:
https://ideas.repec.org/p/bdr/borrec/647.html; https://ideas.repec.org/p/col/000094/008230.html; https://ideas.repec.org/p/col/000092/008170.html
Author(s):
García-Suaza, Andrés Felipe; Gómez-González, José Eduardo
Publisher(s):
Facultad de Economía; Banco de la República; Universidad del Rosario
Tags:
332.456; Cambio exterior::Modelos Econométricos; Mercado monetario; Política monetaria; Economía internacional; Momentum; Foreign exchange markets; Hazard duration analysis; Emerging economies; C41 - Duration Analysis; Optimal Timing Strategies; G14 - Information and Market Efficiency; Event Studies; Insider Trading; G15 - International Financial Markets; Cambio exterior -- Países emergentes; Tipos de cambio; Cambio exterior -- Estudios comparados; Mercados de divisas; G15 - Mercados financieros internacionales; G14 - Información y eficiencia del mercado; Estudios de casos; tráfico de información privilegiada; C41 - Análisis de duración; Estrategias de momento óptimo; Momentum, foreign exchange markets, hazard duration analysis, emerging economies.; Momentum, foreign exchange markets, hazard duration analysis, emerging economies; Cambio exterior -- Modelos econométricos
paper description
This study proposes a new method for testing for the presence of momentum in nominal exchange rates, using a probabilistic approach. We illustrate our methodology estimating a binary response model using information on local currency / US dollar exchange rates of eight emerging economies. After controlling for important variables a§ecting the behavior of exchange rates in the short-run, we show evidence of exchange rate inertia; in other words, we Önd that exchange rate momentum is a common feature in this group of emerging economies, and thus foreign exchange traders participating in these markets are able to make excess returns by following technical analysis strategies. We Önd that the presence of momentum is asymmetric, being stronger in moments of currency depreciation than of appreciation. This behavior may be associated with central bank intervention