Economic momentum and currency returns

Magnus Dahlquist and Henrik Hasseltoft

Journal of Financial Economics, 2020, vol. 136, issue 1, 152-167

Abstract: Past trends in fundamentals linked to economic activity and inflation predict currency returns. We find that a trading strategy that goes long currencies with strong economic momentum and short currencies with weak economic momentum exhibits an annualized Sharpe ratio of 0.70 and yields a significant alpha when controlling for standard carry, momentum, and value strategies. The economic momentum strategy subsumes the alpha of carry trades, suggesting that differences in past economic trends capture cross-country differences in carry.

Keywords: Carry trade; Foreign exchange rates; Predictability; Trend following; Trends (search for similar items in EconPapers)
JEL-codes: F31 G12 G15 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (19)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:136:y:2020:i:1:p:152-167

DOI: 10.1016/j.jfineco.2019.09.002

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