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Momentum in stock market returns: Implications for risk premia on foreign currencies

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  • Thomas Nitschka

Abstract

Momentum in foreign stock market returns is exploitable as signal of currency excess returns. Past stock market winner currencies offer higher returns than past stock market loser currencies. This finding is unrelated to interest rate differentials. Funding liquidity risk explains the time series variation in foreign stock market momentum sorted currency portfolio returns. Their cross-sectional dispersion is hardly rationalized by systematic risk factors in contrast to forward discount and currency momentum sorted currency portfolios. This latter finding reflects that fundamentals driving stock market momentum based currency portfolio returns are not related to recently proposed currency risk factors in the cross-section.

Suggested Citation

  • Thomas Nitschka, 2010. "Momentum in stock market returns: Implications for risk premia on foreign currencies," Working Papers 2010-11, Swiss National Bank.
    • Handle: RePEc:snb:snbwpa:2010-11
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    File URL: https://www.snb.ch/en/publications/research/working-papers/2010/working_paper_2010_11
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    References listed on IDEAS

    as
    1. Akram, Q. Farooq & Rime, Dagfinn & Sarno, Lucio, 2008. "Arbitrage in the foreign exchange market: Turning on the microscope," Journal of International Economics, Elsevier, vol. 76(2), pages 237-253, December.
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    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation: Models and Applications
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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