Currency momentum strategies based on the Chinese Yuan: Timing of foreign exchange volatility

Ching-Chi Hsu and Miao-Ling Chen

Journal of International Financial Markets, Institutions and Money, 2021, vol. 72, issue C

Abstract: This study provides an empirical investigation of currency momentum strategies traded on the Chinese Yuan (RMB). Using a cross trading strategy, we find that the RMB-based currency momentum (RCMOM) strategies are profitable and yield excess returns of up to 5% per annum (p.a.). The results are robust to risk adjustment and sub-periods analysis. We further calculate the foreign exchange volatility to explain the profits of RCMOM strategies. Our evidence shows that increased foreign exchange volatility is associated with higher RCMOM profits, and the strategies are more profitable with high volatility of the Chinese stock market. Considering the influence of Chinese market states in foreign exchange volatility, the RCMOM returns are insignificant. Our results suggest that the impact of foreign exchange risk is correlated to China’s market states.

Keywords: RMB-based currency momentum strategy; Foreign exchange volatility; Market states (search for similar items in EconPapers)
JEL-codes: E52 F31 G12 G15 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:intfin:v:72:y:2021:i:c:s1042443121000342

DOI: 10.1016/j.intfin.2021.101315

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