Currency Momentum Strategies

Menkhoff, Lukas; Sarno, Lucio; Schmeling, Maik; Schrimpf, Andreas

doi:10.2139/ssrn.1809776

Download This Paper

Open PDF in Browser

Add Paper to My Library

Currency Momentum Strategies

86 Pages Posted: 21 Apr 2011 Last revised: 7 Nov 2011

See all articles by Lukas Menkhoff

Lukas Menkhoff

Humboldt-Universität zu Berlin; Kiel Institute for the World Economy; German Institute for Economic Research (DIW Berlin)

Lucio Sarno

University of Cambridge - Judge Business School; Centre for Economic Policy Research (CEPR)

Maik Schmeling

Goethe University Frankfurt - Department of Finance; Centre for Economic Policy Research (CEPR)

Andreas Schrimpf

Bank for International Settlements (BIS) - Monetary and Economic Department; Centre for Economic Policy Research (CEPR); University of Tuebingen

There are 3 versions of this paper

Date Written: 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.

Keywords: Momentum returns, Limits to Arbitrage, Idiosyncratic Volatility, Carry Trades

JEL Classification: F31, G12, G15

Suggested Citation: Suggested Citation

Menkhoff, Lukas and Sarno, Lucio and Schmeling, Maik and Schrimpf, Andreas, Currency Momentum Strategies (November 7, 2011). Available at SSRN: https://ssrn.com/abstract=1809776 or http://dx.doi.org/10.2139/ssrn.1809776