A test of momentum trading strategies in foreign exchange markets: evidence from the G7

Abstract: In this trading strategy study, we ask three questions. • does momentum exist in foreign exchange markets? • what is the impact of transaction costs on excess returns? • can a consolidated trading signal garner excess returns and if so, what is the source of such returns? Using total return momentum strategies in the foreign exchange markets of the G7 for the period 1980 through 2004, the answers from this study are as follows: we find evidence of momentum; however, such momentum appears transitory, particularly for longer lookback periods. As expected, transaction costs have a material negative impact on excess returns. Finally, a consolidated signal garners excess returns; however, a bootstrap simulation finds that the source of these returns is a function of autocorrelation.