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Currency Momentum Strategies

Author

Listed:
  • 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)

Abstract

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.

Suggested Citation

  • Lukas Menkhoff & Lucio Sarno & Maik Schmeling & Andreas Schrimpf, 2012. "Currency Momentum Strategies," Working Paper series 09_12, Rimini Centre for Economic Analysis.
  • Handle: RePEc:rim:rimwps:09_12
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    Keywords

    Momentum returns; Limits to Arbitrage; Idiosyncratic Volatility; Carry Trades;

    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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