Currency Momentum Strategies

Lukas Menkhoff, Lucio Sarno, Andreas Schrimpf and Maik Schmeling

No 8747, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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% 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, 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 which prevent momentum returns from being easily exploitable in currency markets.

Keywords: Momentum returns; Carry trades; Idiosyncratic volatility; Limits to arbitrage (search for similar items in EconPapers)
JEL-codes: F31 G12 G15 (search for similar items in EconPapers)
Date: 2012-01
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Citations: View citations in EconPapers (213)

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Related works:
Journal Article: Currency momentum strategies (2012)
Working Paper: Currency Momentum Strategies (2012)
Working Paper: Currency Momentum Strategies (2011)
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