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Currency Momentum Strategies

  • 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)

We provide a broad empirical investigation of momentum strategies in foreign exchange markets. We find a significant 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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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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