Can we predict currency momentum crashes?

Mario Cerrato and Zhekai Zhang

Working Papers from Business School - Economics, University of Glasgow

Abstract: We report robust empirical evidence that currency momentum crash is predictable. We show that the payoff of a currency momentum strategy has a time-varying beta structure and is linked to the carry trade factor (HML) proposed by Lustig et al. (2011). The currency momentum beta to HML is conditioned on the previous and contemporaneous HML portfolio returns. This risk pattern introduces a written call-option-like payoff in currency momentum strategies. In particular, when carry trade is recovering from previous crashes, momentum strategies lose money. We propose two currency momentum strategies to mitigate momentum crash risk.

JEL-codes: G10 G12 G15 (search for similar items in EconPapers)
Date: 2019-11
New Economics Papers: this item is included in nep-ore
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Persistent link: https://EconPapers.repec.org/RePEc:gla:glaewp:2019_12

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