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Momentum in stock market returns: implications for risk premia on foreign currencies

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  • Thomas Nitschka

Abstract

Momentum in foreign stock market returns signals currency excess returns. Portfolios of currencies from past stock market winner countries offer higher risk premia than past stock market loser currency portfolios. This pattern is unrelated to the currencies’ forward discounts. While recently proposed asset-pricing models for currency returns work reasonably well in explaining the time variation in the stock market momentum-sorted currency portfolio returns, rationalizing the average excess returns on these portfolios remains a challenge. Only the introduction of an ad-hoc motivated factor, extracted from the stock market momentum-sorted currency portfolio returns, helps in this respect.

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File URL: http://hdl.handle.net/10.1080/09603107.2012.732686
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Article provided by Taylor & Francis Journals in its journal Applied Financial Economics.

Volume (Year): 23 (2013)
Issue (Month): 7 (April)
Pages: 551-560

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Handle: RePEc:taf:apfiec:v:23:y:2013:i:7:p:551-560

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  1. Q. Farooq Akram, & Dagfinn Rime & Lucio Sarno, 2005. "Arbitrage in the foreign exchange market: Turning on the microscope," Working Paper 2005/12, Norges Bank.
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