86 Pages Posted: 21 Apr 2011 Last revised: 7 Nov 2011
Date Written: November 7, 2011
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
By Karen Lewis