Title: Momentum and trend following trading strategies for currencies revisited : combining academia and industry
Authors : Rohrbach, Janick
Suremann, Silvan
Osterrieder, Jörg
Published in : International Finance eJournal
Volume(Issue) : 9
Issue : 72
Publisher / Ed. Institution : Social Science Research Network
Issue Date: Jun-2017
License (according to publishing contract) : Licence according to publishing contract
Language : English
Subjects : Momentum; Trading; Currency
Subject (DDC) : 332: Financial economics
Abstract: Momentum trading strategies are thoroughly described in the academic literature and used in many trading strategies by hedge funds, asset managers, and proprietary traders. Baz et al. (2015) describe a momentum strategy for different asset classes in great detail from a practitioner’s point of view. Using a geometric Brownian Motion for the dynamics of the returns of financial instruments, we extensively explain the motivation and background behind each step of a momentum trading strategy. Constants and parameters that are used for the practical implementation are derived in a theoretical setting and deviations from those used in Baz et al. (2015) are shown. The trading signal is computed as a mixture of exponential moving averages with different time horizons. We give a statistical justification for the optimal selection of time horizons. Furthermore, we test our approach on global currency markets, including G10 currencies, emerging market currencies, and cryptocurrencies. Both a time series portfolio and a cross-sectional portfolio are considered. We find that the strategy works best for traditional fiat currencies when considering a time series based momentum strategy. For cryptocurrencies, a cross-sectional approach is more suitable. The momentum strategy exhibits higher Sharpe ratios for more volatile currencies. Thus, emerging market currencies and cryptocurrencies have better performances than the G10 currencies. This is the first comprehensive study showing both the underlying statistical reasons of how such trading strategies are constructed in the industry as well as empirical results using a large universe of currencies, including cryptocurrencies.
Departement: School of Engineering
Organisational Unit: Institute of Data Analysis and Process Design (IDP)
Publication type: Contribution to magazine or newspaper
DOI : 10.2139/ssrn.2949379
URI: https://digitalcollection.zhaw.ch/handle/11475/15965
Appears in Collections:Publikationen School of Engineering

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