Economic Momentum and Currency Returns

70 Pages Posted: 18 Mar 2015 Last revised: 4 Apr 2019

See all articles by Magnus Dahlquist

Magnus Dahlquist

Stockholm School of Economics; Swedish House of Finance

Henrik Hasseltoft

affiliation not provided to SSRN

Date Written: March 31, 2019

Abstract

Past trends in fundamentals linked to economic activity and inflation predict currency returns. We find that a trading strategy that goes long currencies with strong economic momentum and short currencies with weak economic momentum exhibits an annualized Sharpe ratio of 0.70 and yields a significant alpha when controlling for standard carry, momentum, and value strategies. The economic momentum strategy subsumes the alpha of carry trades, suggesting that differences in past economic trends capture cross-country differences in carry.

Keywords: Carry trade, foreign exchange rates, predictability, trend following, trends.

JEL Classification: F31, G12, G15

Suggested Citation

Dahlquist, Magnus and Hasseltoft, Henrik, Economic Momentum and Currency Returns (March 31, 2019). Swedish House of Finance Research Paper No. 16-14, Available at SSRN: https://ssrn.com/abstract=2579666 or http://dx.doi.org/10.2139/ssrn.2579666

Magnus Dahlquist (Contact Author)

Stockholm School of Economics ( email )

Drottninggatan 98
Stockholm, SE-111 60
Sweden

Swedish House of Finance ( email )

Drottninggatan 98
111 60 Stockholm
Sweden

Henrik Hasseltoft

affiliation not provided to SSRN

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