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Dissecting Currency Momentum

Author

Listed:
  • 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
    as

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    Cited by:

    1. is not listed on IDEAS
    2. Iwanaga, Yasuhiro & Sakemoto, Ryuta, 2025. "Conditional currency momentum portfolios," International Review of Financial Analysis, Elsevier, vol. 99(C).
    3. Asano, Takao & Cai, Xiaojing & Sakemoto, Ryuta, 2025. "Global foreign exchange volatility, ambiguity, and currency carry trades," Journal of Banking & Finance, Elsevier, vol. 178(C).
    4. Iwanaga, Yasuhiro & Sakemoto, Ryuta, 2024. "Cross-momentum strategies in the equity futures and currency markets," Journal of International Money and Finance, Elsevier, vol. 148(C).
    5. Hutchinson, Mark C. & Kyziropoulos, Panagiotis E. & O’Brien, John & O’Reilly, Philip & Sharma, Tripti, 2022. "Technical trading rule profitability in currencies: It’s all about momentum," Research in International Business and Finance, Elsevier, vol. 63(C).
    6. Burnside, Craig & Cerrato, Mario & Zhang, Zhekai, 2025. "Foreign Exchange Order Flow as a Risk Factor," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 60(5), pages 2555-2582, August.
    7. Tabash, Mosab I. & Sheikh, Umaid A. & Roubaud, David & Galariotis, Emilios & Grebinevych, Oksana, 2025. "Do forward exchange rate conditions intervene with the transmission of stock market volatility and COVID-19 impact? Sign and location-based asymmetries," Research in International Business and Finance, Elsevier, vol. 77(PB).
    8. repec:gla:glaewp:2023-03 is not listed on IDEAS
    9. 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.
    10. Ma, Tian & Liao, Cunfei & Jiang, Fuwei, 2024. "Factor momentum in the Chinese stock market," Journal of Empirical Finance, Elsevier, vol. 75(C).
    11. Aldunate, Felipe & Da, Zhi & Larrain, Borja & Sialm, Clemens, 2025. "Pension fund flows, exchange rates, and covered interest rate parity," Journal of Financial Economics, Elsevier, vol. 170(C).

    More about this item

    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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