Currency Momentum, Carry Trade, and Market Illiquidity
39 Pages Posted: 15 Aug 2014 Last revised: 29 Mar 2016
Date Written: 2016
This study empirically examines the effect of equity market illiquidity on the excess returns of currency momentum and carry trade strategies. Results show that equity market illiquidity explains the evolution of currency momentum strategy payoffs, but not carry trade. Returns on currency momentum are low following months of high equity market illiquidity. However, in the recent decade, illiquidity positively predicts the associated payoffs. The findings withstand various robustness checks and are economically significant, approximating in value to one-third of average monthly profits.
Keywords: Currency Momentum; Carry Trades; Market Illiquidity
JEL Classification: F31, G15
Suggested Citation: Suggested Citation