The Implementation of an Adjusted Relative Strength Index Model in the Foreign Currency and Energy Markets of Emerging and Developed Economies

Abstract

A new model called Adjusted RSI (AdRSI) is proposed and tested over the most actively traded currency pairs. The simultaneous analysis of the crude oil and natural gas energy markets, allows to shed light on potential cross-market relationships. The analysis is robust tested over a pre and post financial crisis period, using daily data over 2001-2015. The model is benchmarked with the traditional RSI model and a buy-and-hold strategy. Findings support an inverse relationship between energy and foreign currency markets, where foreign currency markets relatively outperformed in the post crisis period, under the buy-and-hold model. The RSI model produced negative reward-to-volatility values in both pre and post crisis periods. Emerging markets tend to outperform developed ones under the buy-and-hold model, and developed markets tend to lead in the RSI model. While energy markets tend to have higher risk, the Chinese yuan had the lowest annualized risk across all models. The AdRSI model produced higher annualized returns than the RSI, with relatively lower number of trades, slightly higher annualized risk. Overall, the buy-and-hold model was superior in generating relatively higher reward-to-volatility values for all markets, except for the AUD/USD, JPY/USD and CHF/USD where the AdRSI outperformed all models.