Research On Foreign Exchange Market Trading Strategy Based On Combination Method

In the foreign exchange market where both long and short-selling mechanisms are relatively sound,FX investors always have the opportunity to invest(or maintain value).Under the floating exchange rate system,the price of currency is basically determined by the supply and demand of the foreign exchange market.Therefore,this paper selects currencies of nine representative OECD countries from December 31,1996 to December 31,2016 to study the portfolio investment strategy in the FX market.However,under this system,the ever-changing exchange rate makes the FX market investment lurking with great risks.Momentum strategy is one of the common methods of investment in the FX market.The momentum effect seems to be an inherent feature of the asset price movement in a certain period of time.However,more and more scholars have found that the use of momentum strategies in the case of large fluctuations in asset prices can lead to a short-term decline in yields – momentum collapse,which has become the biggest factor restricting the use of momentum strategies.It will result in the loss of revenue accumulated by the previous strategy,which is a dangerous risk exposure.Another common investment method in the FX market is the carry trade strategy,but it doesn't work during the financial crisis.Therefore,a single foreign exchange trading strategy has great instability and collapse risks.From the perspective of diversification risk,this paper combines macroeconomic fundamental information to construct an equal weight combination of four strategies: momentum strategy,carry trade strategy,actual interest rate difference rule and output difference rule.Through empirical research,we find that the static investment portfolio between the strategies has a positive and stable excess return both during the full sample period and during the financial crisis,with low volatility risk.In this paper,we also detect how to improve the performance of exchange rate momentum strategy using volatility information.Based on the equally weighted momentum portfolio,we consider a trading scheme which allocates wealth between momentum portfolio and Treasury bill and the weight of each asset is inversely dependent of the volatility forecasts.Our results indicate that this strategy significantly improves upon the momentum strategy,especially during the period of financial crisis.The superiority of our strategy is robust for the look-back periods from 1 to 6 months.The performance of our strategy can be further improved after imposing a constraint on the optimal weight of each asset.