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Return dispersion risk in FX and global equity markets: Does it explain currency momentum?

Klaus Grobys, Jari-Pekka Heinonen and James Kolari

International Review of Financial Analysis, 2018, vol. 56, issue C, 264-280

Abstract: We investigate the potential link between momentum in currency returns and global economic risk as measured by currency return dispersion (RD). Initial tests contribute to the exchange rate puzzle by showing that a common macroeconomic risk component in currency markets is present in global equity markets. Subsequent tests indicate that the spread on zero-cost currency momentum strategies is larger and highly significant in high RD states compared to low RD states. Also, the relation between these momentum payoffs and global economic risk appears to increase linearly in risk. Based on this evidence, we conclude that global economic risk as proxied by RD helps to explain currency momentum profits.

Keywords: Return dispersion; Momentum; Currency markets; Global economic risk (search for similar items in EconPapers)
JEL-codes: G12 G14 (search for similar items in EconPapers)
Date: 2018
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