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Momentum in Stock Market Returns, Risk Premia on Foreign Currencies and International Financial Integration


Thomas Nitschka


Swiss National Bank

March 9, 2009


Abstract:     
Momentum in developed countries' stock market index returns can be exploited to form portfolios of excess returns on foreign currencies as relatively high past foreign stock market returns signal a foreign currency appreciation. Two risk factors extracted from the stock index momentum based currency portfolio returns explain more than 80 percent of their cross-sectional variation. In contrast to currency risk factors constructed from forward discount sorted currency portfolios, these risk factors are not related to business cycle or liquidity risk. But high currency risk premia are associated with relatively deep financial integration and a high level of risk sharing.

Number of Pages in PDF File: 57

Keywords: Currency returns, financial integration, momentum, risk premia, UIP

JEL Classification: F31, F37, G15

working papers series


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Date posted: March 11, 2009  

Suggested Citation

Nitschka, Thomas, Momentum in Stock Market Returns, Risk Premia on Foreign Currencies and International Financial Integration (March 9, 2009). Available at SSRN: http://ssrn.com/abstract=1355928 or http://dx.doi.org/10.2139/ssrn.1355928

Contact Information

Thomas Nitschka (Contact Author)
Swiss National Bank ( email )
Börsenstrasse 15
Zurich, CH-8022
Switzerland
HOME PAGE: http://sites.google.com/site/tnitschka/
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