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International Finance. Currency Momentum Strategies
Finance & Accounting
Pages 6 (1506 words)
International Finance: Currency Momentum Strategies October 08, 2012 1. Introduction This paper analyses an article on foreign currency FX momentum strategies written by Menkhoff et al (2011) who have studied the currency movements and trends for 48 currencies1.
2. Summary of the article Using time series data of more than 34 years, the paper has examined some important aspects of FX momentum. The article provides an in-depth analysis of the unsystematic and systematic risks, comparing different momentum strategies, describing the importance of transaction costs, sources for non-standard momentum, over and under reaction and the arbitrage limits. The paper has also researched in effect of business cycle risks on currency momentum. 2.1. Fundamentals According to Menkhoff et al (2011, p. 5-8), momentum strategy refers to the trading strategy where an investor seizes an opportunity to ride a rising or a falling trend of the currency market. The basic idea is that an investor will take a long position for a basket of currency that shows an increasing trending price or a short position that sees a decreasing price. Momentum trading is done with the belief that once a trend is established, it will continue in the same direction for some time before stabilising and then reducing. If one sells when the prices are showing a decreasing trend, then the trader is taking a short position and he wants to reduce the losses and exit the currency before it reaches the bottom. ...
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