A simple test of momentum in foreign exchange markets

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 cont...

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Detalles Bibliográficos
Autores Principales: Garcia-Suaza, Andres, Gómez González, Juan Eduardo
Formato: Documento de trabajo (Working Paper)
Lenguaje:Inglés (English)
Publicado: Universidad del Rosario 2011
Materias:
Acceso en línea:http://repository.urosario.edu.co/handle/10336/10984
Descripción
Sumario: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