International Finance ARP Assignment, 2023
International Finance作业代写 You will examine the performance of momentum trading strategies in the foreign exchange market.
You will examine the performance of momentum trading strategies in the foreign exchange market. Specifically – and pretty new to the literature – you will look at momentum in the returns to trading foreign exchange options.
Since momentum trading is ill-defined, there are many ways to implement a momentum trading strategy and you have considerable flexibility in how you assess the performance of momentum trading. I do not have a strong prior view on how you should implement momentum strategies. This decision is yours and as long as the implementation is a reasonable one it will not affect your grade.
It is important to note that that aim of the project is NOT to search until you find a strategy that yields good risk-adjusted returns. The aim of the project is to evaluate sensible implementations of momentum trading and to reach a conclusion about their performance.
Source data International Finance作业代写
- I will provide time-series of one-month option returns for a range of currencies.
- The data run from late 1990s to 2021.
- The time periods covered by different exchange rates may differ as some currencies only begin to trade later in the sample.
- The returns will be from taking a straddle position in at-the-money foreign exchange options with (usually) a one-month maturity which are held to maturity. This fixes our investment period as one-month. I may send one of you a weekly data set of one-week maturity options. You will have more observations but a shorter maturity. Otherwise, nothing much changes.
- Produce a brief review of the momentum literature, for both cash investments and options. I recommend you start with the original findings from the equity market and then move to evidence from FX. As far as I know, there is no evidence available on momentum on FX options (but it would be super interesting should you find any!). This motivates your work.
- Test for the presence of time series momentumin option returns by examining whether taking a long/short position in an individual currency according to returns over the formation period (t-n, t-m) produce attractive returns over the investment period (t, t+1). International Finance作业代写
- Test for the presence of cross-sectional momentumin option returns by ranking the currencies at time t according to returns in the formation period (t-n, t-m) and taking long/short positions in the biggest winners and biggest losers over the holding period (t, t+1).
- For both time-series and cross-sectional momentum, you should examine whether strategy performance depends on the periods analysed.
- Are you results sensitive to the month of the year?
- In the case of time-series momentum is there consistency across currencies or do strategies that work for some currencies fail when applied to others (indicating a lack of robustness)?
- Are your results consistent across the various years you consider?
- Are your results consistent across market conditions (eg volatility levels)?
Readings International Finance作业代写
There is not a lot of work on FX momentum but you should look at:
Menkhoff, Lukas, et al. “Currency momentum strategies.” Journal of Financial Economics 106.3 (2012): 660-684. https://openaccess.city.ac.uk/id/eprint/3296/1/
This paper considers low frequency cross-sectional momentum in spot and forward FX markets.
The most relevant paper is: Steven L. Heston et al. “Option Momentum”, working paper (2021). http://faculty.marshall.usc.edu/Christopher-Jones/pdf/opmom.pdf.
This paper does more or less what you will be doing (plus extras so don’t panic) but using equity options not FX. Sections 1, 2, 3.1 and 3.4 are the most relevant for your analysis. You do not have to follow what they do exactly, but it is a good start. You can, if you wish, pretty much follow what they do, simply translating as necessary for your data set.