A test of momentum trading strategies in foreign exchange markets: Evidence from the G7

Abstract

Abstract: In this trading strategy study, we ask three questions.
• does momentum exist in foreign exchange markets?
• what is the impact of transaction costs on excess returns?
• can a consolidated trading signal garner excess returns and if so, what is the
source of such returns?
Using total return momentum strategies in the foreign exchange markets of the
G7 for the period 1980 through 2004, the answers from this study are as
follows: we find evidence of momentum; however, such momentum appears
transitory, particularly for longer lookback periods. As expected, transaction
costs have a material negative impact on excess returns. Finally, a consolidated
signal garners excess returns; however, a bootstrap simulation finds that the
source of these returns is a function of autocorrelation.