Currency momentum strategies

Lukas Menkhoff, Lucio Sarno, Maik Schmeling and Andreas Schrimpf

Journal of Financial Economics, 2012, vol. 106, issue 3, 660-684

Abstract: We provide a broad empirical investigation of momentum strategies in the foreign exchange market. We find a significant cross-sectional spread in excess returns of up to 10% per annum (p.a.) between past winner and loser currencies. This spread in excess returns is not explained by traditional risk factors, it is partially explained by transaction costs and shows behavior consistent with investor under- and overreaction. Moreover, cross-sectional currency momentum has very different properties from the widely studied carry trade and is not highly correlated with returns of benchmark technical trading rules. However, there seem to be very effective limits to arbitrage that prevent momentum returns from being easily exploitable in currency markets.

Keywords: Momentum returns; Limits to arbitrage; Idiosyncratic volatility; Carry trades (search for similar items in EconPapers)
JEL-codes: F31 G12 G15 (search for similar items in EconPapers)
Date: 2012
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (193)

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Related works:
Working Paper: Currency Momentum Strategies (2012)
Working Paper: Currency Momentum Strategies (2012)
Working Paper: Currency Momentum Strategies (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:106:y:2012:i:3:p:660-684

DOI: 10.1016/j.jfineco.2012.06.009

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