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Dissecting Currency Momentum

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  • Zhang, Shaojun

    (Ohio State U)

Abstract

This paper shows that currency momentum, which cannot be explained by carry and dollar factors, summarizes the autocorrelation of these factors. A no-arbitrage model postulates that predictable global shock volatility can simultaneously generate factor and currency momentum. Empirically, carry and dollar factors are strongly autocorrelated and only earn significantly positive excess returns following positive factor returns. Future factor volatility drives out the autocorrelation. Factor momentum not only outperforms currency momentum but also explains it, whereas idiosyncratic returns do not generate momentum. Currency momentum longs the factors following positive factor returns and shorts the factors following losses.

Suggested Citation

  • Zhang, Shaojun, 2020. "Dissecting Currency Momentum," Working Paper Series 2020-15, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
    • Handle: RePEc:ecl:ohidic:2020-15
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    2. Craig Burnside & Mario Cerrato & Zhekai Zhang, "undated". "Foreign exchange order flow as a risk factor," Working Papers 2023-03, Business School - Economics, University of Glasgow.
    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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    JEL classification:

    • F0 - International Economics - - General
    • F3 - International Economics - - International Finance
    • G0 - Financial Economics - - General
    • G1 - Financial Economics - - General Financial Markets

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