A momentum trading strategy based on the low frequency component of the exchange rate
In this paper, we develop a momentum trading strategy based on the low frequency trend component of the spot exchange rate. Using kernel regression and the high-pass filter of Hodrick and Prescott [Hodrick, R., Prescott, E., 1997. Post-war US business cycles: An empirical investigation. Journal of Money, Credit and Banking 29, 1-16], we recover the non-linear trend in the monthly exchange rate and use short-term momentum in this to generate buy and sell signals. The low frequency momentum trading strategy offers greater directional accuracy, higher returns and Sharpe ratios, lower maximum drawdown and less frequent trading than traditional moving average rules. Moreover, unlike traditional moving average rules, the performance of the low frequency momentum trading strategy is relatively robust across different time periods. The low frequency momentum trading strategy is also robust to the choice of smoothing parameter (in the case of the HP filter) and the distribution and bandwidth parameter (in the case of kernel regression) over a wide range of values.
Year of publication: |
2009
|
---|---|
Authors: | Harris, Richard D.F. ; Yilmaz, Fatih |
Published in: |
Journal of Banking & Finance. - Elsevier, ISSN 0378-4266. - Vol. 33.2009, 9, p. 1575-1585
|
Publisher: |
Elsevier |
Keywords: | Momentum Moving average rules Hodrick-Prescott filter Kernel regression Trading strategy |
Saved in:
Online Resource
Saved in favorites
Similar items by person
-
A cyclical model of exchange rate volatility
Harris, Richard D.F., (2011)
-
Judging the judges through accuracy-implication metrics: The case of inventory forecasting
Harris, Richard D.F., (2010)
-
A momentum trading strategy based on the low frequency component of the exchange rate
Harris, Richard D.F., (2009)
- More ...