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Currency Momentum StrategiesLukas MenkhoffLeibniz Universitaet Hannover - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute for Economic Research) Lucio SarnoCity University London - Sir John Cass Business School; Centre for Economic Policy Research (CEPR) Maik SchmelingCity University London - Sir John Cass Business School Andreas SchrimpfBank for International Settlements (BIS) - Monetary and Economic Department November 7, 2011 Abstract: We provide a broad empirical investigation of momentum strategies in the foreign exchange market. 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, it is partially explained by transaction costs and shows behavior consistent with investor under- and over-reaction. Moreover, cross-sectional currency momentum has very different properties from the widely studied carry trade and is not highly correlated with returns of benchmark technical trading rules. However, there seem to be very effective limits to arbitrage which prevent momentum returns from being easily exploitable in currency markets.
Number of Pages in PDF File: 86 Keywords: Momentum returns, Limits to Arbitrage, Idiosyncratic Volatility, Carry Trades JEL Classification: F31, G12, G15 working papers seriesDate posted: April 21, 2011 ; Last revised: November 7, 2011Suggested CitationContact Information
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