Global Political Risk and Currency Momentum
95 Pages Posted: 1 Nov 2014 Last revised: 11 Mar 2016
Date Written: March 9, 2016
Using a measure of global political risk, relative to the U.S., that captures unexpected political conditions, we show that political risk is priced in the cross section of currency momentum and contains information beyond other risk factors. Our results are robust after controlling for transaction costs, reversals and alternative limits to arbitrage. The global political environment affects the profitability of the momentum strategy in the foreign exchange market; investors following such strategies are compensated for the exposure to the global political risk of those currencies they hold, i.e., the past winners, and exploit the lower returns of loser portfolios.
Keywords: Currency Momentum, FX Risk premium, Limits to Arbitrage, Political Risk
JEL Classification: F31, G11, G12, G15
Suggested Citation: Suggested Citation