Jump-Only Momentum and Reversal in Currency Markets
Log in to collectAcademic paper
Jump-Only Momentum and Reversal in Currency Markets
Yunhao He
- CHUniversity of Zurich
- CHSwiss Finance Institute
Strategy in a nutshell
The strategy trades emerging market currencies—CZK, HUF, MXN, PLN, and ZAR—using jumps in FX prices as signals. Price jumps are detected via a log-return statistic scaled by jump-robust volatility and compared to a Gumbel distribution. Returns are decomposed into continuous, positive jump, and negative jump components over five-minute intervals. Currencies are sorted monthly into five portfolios based on momentum or reversal across 624 formation-period combinations (-12 to +12 months), with the top portfolio held for one month.
Economic rationale
Separating jumps from continuous returns reveals stronger momentum or reversal signals. In emerging markets, positive jumps indicate momentum and negative jumps indicate reversal. Jump-based strategies outperform classic approaches, more than doubling Sharpe ratios, remaining profitable after transaction costs, stable across time, and independent of US business cycle risk factors.