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Cross-sectional return dispersion and currency momentum

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  • Eriksen, Jonas N.

Abstract

I assess the relation between cross-sectional return dispersion in foreign exchange (FX) markets and currency momentum. I find that cross-sectional dispersion is priced in the cross-section of currency momentum returns and that an unexpected increase in cross-sectional dispersion is associated with positive (negative) excess returns to winner (loser) currencies. This mechanism can be related to monetary policy conditions. The empirical findings are robust to the inclusion of traditional currency risk factors, liquidity and market volatility variables, and transaction costs. Finally, the explanatory ability of cross-sectional dispersion extends to broader cross-sections of currency portfolios and to individual currencies.

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  • Eriksen, Jonas N., 2019. "Cross-sectional return dispersion and currency momentum," Journal of Empirical Finance, Elsevier, vol. 53(C), pages 91-108.
  • Handle: RePEc:eee:empfin:v:53:y:2019:i:c:p:91-108
    DOI: 10.1016/j.jempfin.2019.07.002
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    More about this item

    Keywords

    Foreign exchange; Currency momentum; Return dispersion; Asset pricing;
    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
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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