The Research on the Application of Momentum Strategies in China’s Foreign Exchange Market
|School||Beijing Jiaotong University|
|Keywords||momentum strategies foreign exchange market behavioral finance exchange control transaction cost|
Momentum strategy is a typical phenomenon in behavioral finance, often used to study the stock market. But the research on the exchange market has just started. This paper use theoretical analysis and empirical analysis to research on the application of momentum strategies in China’s foreign exchange market. In empirical analysis, this paper first put interest rate differential into the formula of excess returns, which defines the scope of excess returns more comprehensively. Furthermore, this paper quantifies the impact on momentum returns of transaction cost, complements the lack of empirical analysis in earlier studies. Theoretical analysis believes that our exchange market is not fully effective and the investors can obtain excess returns through investment strategies. Empirical results confirm the conclusion of theoretical analysis. The results shows that in all64kinds of momentum strategies, without considering transaction cost,46kinds of momentum strategies can obtain excess returns and the best momentum strategy should have a "maturity mismatch" of formation period and holding period. Considering transaction cost all the momentum strategies can’t obtain excess returns and there is a huge difference of excess returns between considering and not considering transaction cost. The empirical result shows that transaction cost has a significant influence on momentum returns, if transaction cost can be controlled at a very small level, momentum strategies can be applicable in our exchange market. Transaction cost is controlled by bank and generated by the lack of competition in China’s foreign exchange banks. Therefore, it’s necessary to promote competition of foreign exchange banks. In addition to this, we should loosen exchange control gradually, making foreign exchange market playing its role sufficiently.