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Currency Momentum Strategies

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  • Lukas Menkhoff

    ()
    (Department of Economics, Leibniz Universitätt Hannover, Germany)

  • Lucio Sarno

    ()
    (Faculty of Finance, Cass Business School, City University London, UK; Centre for Economic Policy Research (CEPR), UK; The Rimini Centre for Economic Analysis (RCEA), Italy)

  • Maik Schmeling

    ()
    (Department of Economics, Leibniz Universitätt Hannover, Germany)

  • Andreas Schrimpf

    ()
    (Bank for International Settlements, Switzerland)

Abstract

We provide a broad empirical investigation of momentum strategies in foreign exchange markets. We find a signi cant 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 and shows behavior consistent with investor over- and under-reaction. Moreover, currency momentum is mostly driven by return continuation in spot rates and has very different properties from the widely studied carry trade. However, there seem to be very effective limits to arbitrage which prevent momentum returns from being easily exploitable in foreign exchange markets.

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Bibliographic Info

Paper provided by The Rimini Centre for Economic Analysis in its series Working Paper Series with number 09_12.

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Date of creation: Mar 2012
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Handle: RePEc:rim:rimwps:09_12

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Keywords: Momentum returns; Limits to Arbitrage; Idiosyncratic Volatility; Carry Trades;

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Citations

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Cited by:
  1. Dick, Christian D. & Menkhoff, Lukas, 2012. "Exchange rate expectations of chartists and fundamentalists," ZEW Discussion Papers 12-026, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  2. Gino Cenedese & Lucio Sarno & Ilias Tsiakas, 2014. "Foreign Exchange Risk and the Predictability of Carry Trade Returns," Working Paper Series 02_14, The Rimini Centre for Economic Analysis.
  3. Nucera, Federico & Valente, Giorgio, 2013. "Carry trades and the performance of currency hedge funds," Journal of International Money and Finance, Elsevier, vol. 33(C), pages 407-425.
  4. Dagfinn Rime & Andreas Schrimpf, 2013. "The anatomy of the global FX market through the lens of the 2013 Triennial Survey," BIS Quarterly Review, Bank for International Settlements, December.
  5. Clare, Andrew & Seaton, James & Smith, Peter N. & Thomas, Stephen, 2014. "Trend following, risk parity and momentum in commodity futures," International Review of Financial Analysis, Elsevier, vol. 31(C), pages 1-12.
  6. Neely, Christopher J. & Weller, Paul A., 2013. "Lessons from the evolution of foreign exchange trading strategies," Journal of Banking & Finance, Elsevier, vol. 37(10), pages 3783-3798.
  7. Karnaukh, Nina & Ranaldo, Angelo & Söderlind, Paul, 2013. "Understanding FX Liquidity," Working Papers on Finance 1315, University of St. Gallen, School of Finance.
  8. Tajaddini, Reza & Crack, Timothy Falcon, 2012. "Do momentum-based trading strategies work in emerging currency markets?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 22(3), pages 521-537.
  9. Malliaris, A.G. & Malliaris, Mary, 2011. "Are foreign currency markets interdependent? evidence from data mining technologies," MPRA Paper 35261, University Library of Munich, Germany.
  10. ter Ellen, Saskia & Verschoor, Willem F.C. & Zwinkels, Remco C.J., 2013. "Dynamic expectation formation in the foreign exchange market," Journal of International Money and Finance, Elsevier, vol. 37(C), pages 75-97.
  11. Victoria Galsband & Thomas Nitschka, 2013. "Currency excess returns and global downside market risk," Working Papers 2013-07, Swiss National Bank.
  12. Andrew Clare & James Seaton & Peter N. Smith & Stephen Thomas, 2013. "The Trend is Our Friend: Risk Parity, Momentum and Trend Following in Global Asset Allocation," CAMA Working Papers 2013-24, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  13. Raza, Ahmad & Marshall, Ben R. & Visaltanachoti, Nuttawat, 2014. "Is there momentum or reversal in weekly currency returns?," Journal of International Money and Finance, Elsevier, vol. 45(C), pages 38-60.
  14. Travis J. Berge, 2011. "Forecasting disconnected exchange rates," Research Working Paper RWP 11-12, Federal Reserve Bank of Kansas City.
  15. Jacob Gyntelberg & Andreas Schrimpf, 2011. "FX strategies in periods of distress," BIS Quarterly Review, Bank for International Settlements, December.

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