Currency Momentum Strategies

Lukas Menkhoff, Lucio Sarno, Maik Schmeling and Andreas Schrimpf

No 366, BIS Working Papers from Bank for International Settlements

Abstract: We provide a broad empirical investigation of momentum strategies in the foreign exchange market. We find a signiffcant cross-sectional spread in excess returns of up to 10% 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 over-reaction. Moreover, crosssectional 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 which 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)
Pages: 89 pages
Date: 2011-12
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (15)

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Related works:
Journal Article: Currency momentum strategies (2012)
Working Paper: Currency Momentum Strategies (2012)
Working Paper: Currency Momentum Strategies (2012)
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