A simple test of momentum in foreign exchange markets Academic Article


  • Emerging Markets Finance and Trade


  • This study proposes a new method for testing for the presence of momentum in nominal exchange rates, using a probabilistic approach. We illustrate our methodology estimating a binary response model using information on local currency / US dollar exchange rates of eight emerging economies. After controlling for important variables affecting the behavior of exchange rates in the short-run, we show evidence of exchange rate inertia; in other words, we find that exchange rate momentum is a common feature in this group of emerging economies, and thus foreign exchange traders participating in these markets are able to make excess returns by following technical analysis strategies. We find that the presence of momentum is asymmetric, being stronger in moments of currency depreciation than of appreciation. This behavior may be associated with central bank intervention.

publication date

  • 2012-1-1


  • Binary Response Model
  • Central Bank Intervention
  • Common Features
  • Currency
  • Currency Depreciation
  • Emerging Economies
  • Excess Returns
  • Exchange Rates
  • Foreign Exchange
  • Foreign Exchange Market
  • Inertia
  • Methodology
  • Momentum
  • Nominal Exchange Rate
  • Short-run
  • Technical Analysis
  • Testing
  • Traders

International Standard Serial Number (ISSN)

  • 1540-496X

number of pages

  • 12

start page

  • 66

end page

  • 77