The Study Of Currency Momentum On China’s Market

China’s foreign exchange market saw the exchange reform twice in1994and2005. Especially during the second reform in2005, we enhanced the flexibility of the RMB exchange rate and promoted the development of the foreign market. The strengthening of mercerization and financial regulation weaken the market segmentation and administration. The establishment of future market makes the whole exchange market a better place. The exchange rate of RMB rises since2007.Recently, more and more scholars has focused on momentum effect which provides a strong challenge to standard finance theory based on risk as an exception of the efficient market hypothesis. Momentum effect is a phenomenon of the change of price of assets which means the price is continuous and persistent in a range of some time. Momentum effect was first found in the stock market. Academic studies about momentum strategies are mostly focused on stock markets but momentum effects have been also detected in bond and commodity markets. While the study about momentum effects in foreign exchange market is rare relatively, let alone papers focus on China’s exchange market. In this paper, we will study the momentum effect on China’s exchange market.In contrast to the extensive literature on momentum strategies in stock markets, tne literature on currency momentum has mostly developed a somewhat different line of research. The most striking difference is the fact that currency momentum studies generally do not analyze momentum in a cross-section of currencies but in the time series of single exchange rates, often framed as "technical trading rules". In this paper, we follow the strategy which is used in the stock market to construct a cross-sectional currency momentum strategy.The main contents of this paper:The first chapter is the introduction of this paper, which describes the background, content, method and my innovation.The second chapter reviews the relative literatures. Summarize the domestic and overseas scholars about the research methods and the latest achievements of momentum effect. With a view on the basis of previous studies, build my own theory framework to research the momentum effect of China’s foreign exchange market.The third chapter describes how to build the trading rules of the momentum effect. In this paper we follow the momentum trading rules used in stock market to construct our currency momentum strategy and try to explore the reason of momentum returns.The forth chapter is the main part of this paper. It gives the empirical results and simple analysis.Main conclusions and its interpretation are given in the chapter five.In this paper, we go beyond earlier research in a number of directions. First, we analyze a much longer time span and, more importantly, a much larger cross-section of currencies. This extend sample across time and currencies is crucial for our analysis. Second, we follow the momentum trading rules used in equity market to construct our currency momentum portfolio. Third, we can take explicit account of transaction costs, which is crucial since momentum returns are only relevant as long as they survive realistic transaction costs. Forth, we try to analyze the relation between momentum returns and technical trading returns or carry trading rules returns, in order to demonstrate momentum effect is a new phenomenon.Of course, author of this paper only can do part of the research because of kinds of limits, so there are some questions left to be solved for the following scholars. First, the data that are used in this paper is from April2007which only includes the financial crisis in2007and2008, so we can’t make the conclusion about the relation between momentum returns and financial circles. Second, the currencies that are used to explore momentum strategies must not be pegged. And there are only eight currencies can be included that makes a limit for our study. For example, we can’t do the double-sorts analysis. Third, in this paper, we take the currency with the highest lagged return as the winner and the currency with the lowest lagged return as the loser since there are only eight currencies totally. In fact, we can construct the winner and loser portfolio according some rules. Forth, when we study the momentum effect in China’s exchange market, we can do it while consider the characteristics of the Chinese market like Zhiqiang Wang does of the equity market.