Momentum in the foreign exchange market. (2015)
AuthorsGrewal, Armandshow all
This paper investigates the existence of price momentum in the Foreign Exchange market before and after the Global Financial Crisis, by analysing a sample of 18 currency pairs between 2002 and 2013. Using a portfolio formation approach, average spot and excess returns are calculated for investment horizons ranging from one day to one year. Secondly, this paper investigates a possible link between price momentum and the market positioning of speculators by using the US Commodity Futures Trading Commission’s Commitments of Traders report. The results suggest that price momentum in the Foreign Exchange market may be most prevalent over shorter time frames of up to one day. The fall in interest rates after the Global Financial Crisis has reduced the returns from momentum over longer time horizons, with these returns being higher for minor or exotic currency pairs. Lastly, changes to the market position of speculators often precedes the movements in the exchange rate over the following weeks, suggesting that speculators' actions may be an indicator of price continuations.