Currency Momentum, Carry Trade, and Market Illiquidity

39 Pages Posted: 15 Aug 2014 Last revised: 29 Mar 2016

See all articles by Vitaly Orlov

Vitaly Orlov

University of St. Gallen - School of Finance

Date Written: 2016

Abstract

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

Orlov, Vitaly, Currency Momentum, Carry Trade, and Market Illiquidity (2016). Journal of Banking and Finance 67, 1-11, 2016. Available at SSRN: https://ssrn.com/abstract=2480429 or http://dx.doi.org/10.2139/ssrn.2480429

Vitaly Orlov (Contact Author)

University of St. Gallen - School of Finance ( email )

Unterer Graben 21
St.Gallen, CH-9000
Switzerland

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