Currency momentum, carry trade, and market illiquidity

Vitaly Orlov

Journal of Banking & Finance, 2016, vol. 67, issue C, 1-11

Abstract: This study empirically examines the effect of equity market illiquidity on the excess returns of currency momentum and carry trade strategies. Results show that equity market illiquidity explains the evolution of currency momentum strategy payoffs, but not carry trade. Returns on currency momentum are low following months of high equity market illiquidity. However, in the recent decade, illiquidity positively predicts the associated payoffs. The findings withstand various robustness checks and are economically significant, approximating in value to one-third of average monthly profits.

Keywords: Currency momentum; Carry trades; Market illiquidity (search for similar items in EconPapers)
JEL-codes: F31 G15 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (16)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:67:y:2016:i:c:p:1-11

DOI: 10.1016/j.jbankfin.2016.02.010

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