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Economic momentum and currency returns

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  • Dahlquist, Magnus
  • Hasseltoft, Henrik

Abstract

Past trends in fundamentals linked to economic activity and inflation predict currency returns. We find that a trading strategy that goes long currencies with strong economic momentum and short currencies with weak economic momentum exhibits an annualized Sharpe ratio of 0.70 and yields a significant alpha when controlling for standard carry, momentum, and value strategies. The economic momentum strategy subsumes the alpha of carry trades, suggesting that differences in past economic trends capture cross-country differences in carry.

Suggested Citation

  • Dahlquist, Magnus & Hasseltoft, Henrik, 2020. "Economic momentum and currency returns," Journal of Financial Economics, Elsevier, vol. 136(1), pages 152-167.
  • Handle: RePEc:eee:jfinec:v:136:y:2020:i:1:p:152-167
    DOI: 10.1016/j.jfineco.2019.09.002
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    Cited by:

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    2. Mykola Babiak & Jozef Barunik, 2021. "Uncertainty Network Risk and Currency Returns," CERGE-EI Working Papers wp687, The Center for Economic Research and Graduate Education - Economics Institute, Prague.
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    4. Zuzana Rowland & George Lazaroiu & Ivana Podhorská, 2020. "Use of Neural Networks to Accommodate Seasonal Fluctuations When Equalizing Time Series for the CZK/RMB Exchange Rate," Risks, MDPI, Open Access Journal, vol. 9(1), pages 1-21, December.

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    More about this item

    Keywords

    Carry trade; Foreign exchange rates; Predictability; Trend following; Trends;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • 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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