01 Jan Learning From BT Funds Management's "Do Momentum Based Strategies Still Work In Foreign Currency Markets?"
Buying the most attractive currency and selling the least attractive currency obtains average excess returns that are significantly positive.
In this article, Absolute Momentum will be used interchangeably with trend following or time series momentum. Relative Momentum will be used interchangeably with cross-sectional momentum or relative strength.
Relative momentum which has been typically applied to Equities is tested on Currencies. The paper shows that buying the most attractive currency and selling the least attractive currency obtains average excess returns that are significantly positive.
The most and least attractive currency relative to a base currency is ranked using the deviation of short term moving average to long term moving average. Various moving average combinations are used and the strategy gives equal weight to each combination. Rebalancing is performed monthly.
Authors: John Okunev, Derek White
Organisation: BT Funds Management, University Of New South Wales