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Dissecting currency momentum

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  • Zhang, Shaojun

Abstract

This paper shows the cross-sectional and time series momentum in currencies, which cannot be explained by carry and dollar factors, summarize the autocorrelation of these factors. These momentum strategies long currency factors following positive factor returns and short them following losses. Carry and dollar factors are strongly autocorrelated and only earn significantly positive excess returns following positive factor returns. By contrast, idiosyncratic currency returns contain little momentum. Consequently, factor momentum not only outperforms the cross-sectional and time series momentum but also explains them. Limits to arbitrage and time-varying risk premium help explain factor momentum.

Suggested Citation

  • Zhang, Shaojun, 2022. "Dissecting currency momentum," Journal of Financial Economics, Elsevier, vol. 144(1), pages 154-173.
    • Handle: RePEc:eee:jfinec:v:144:y:2022:i:1:p:154-173
    DOI: 10.1016/j.jfineco.2021.05.035
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    3. Tobias Wiest, 2023. "Momentum: what do we know 30 years after Jegadeesh and Titman’s seminal paper?," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 37(1), pages 95-114, March.

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    More about this item

    Keywords

    Factor; Asset pricing; Momentum; Currency premium; Market efficiency;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation: Models and Applications
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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