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Momentum in stock market returns, risk premia on foreign currencies and international financial integration

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Author Info
Thomas Nitschka
Abstract

Momentum in developed countries' stock market index returns can be exploited to form portfolios of excess returns on foreign currencies as relatively high past foreign stock market returns signal a foreign currency appreciation. Two risk factors extracted from the stock index momentum based currency portfolio returns explain more than 80 percent of their cross-sectional variation. In contrast to currency risk factors constructed from forward discount sorted currency portfolios, these risk factors are not related to business cycle or liquidity risk. But high currency risk premia are associated with relatively deep financial integration and a high level of risk sharing.

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Paper provided by Institute for Empirical Research in Economics - IEW in its series IEW - Working Papers with number iewwp405.

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Date of creation: Mar 2009
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Handle: RePEc:zur:iewwpx:405

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Related research
Keywords: Currency returns; financial integration; momentum; risk premia; UIP;

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Find related papers by JEL classification:
F31 - International Economics - - International Finance - - - Foreign Exchange
F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation
G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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    Other versions:
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  6. Sanjeev Bhojraj, 2006. "Macromomentum: Returns Predictability in International Equity Indices," Journal of Business, University of Chicago Press, vol. 79(1), pages 429-428, January. [Downloadable!]
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    Other versions:
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    Other versions:
  15. Markus K. Brunnermeier & Stefan Nagel & Lasse H. Pedersen, 2008. "Carry Trades and Currency Crashes," NBER Working Papers 14473, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
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