Is Currency Momentum a Hedge for Global Economic Risk?

59 Pages Posted: 17 Jun 2015 Last revised: 22 Dec 2016

See all articles by Klaus Grobys

Klaus Grobys

University of Vaasa

Jari-Pekka Heinonen

University of Vaasa - Department of Accounting and Finance

James W. Kolari

Texas A&M University - Department of Finance

Date Written: December 21, 2016

Abstract

We investigate the potential link between momentum in currency returns and global economic risk as measured by currency return dispersion (RD). Initial tests contribute to the exchange rate puzzle by showing that the same macroeconomic risk component in currency markets is present in global equity markets. Subsequent tests indicate that the spread on zero-cost currency momentum strategies is larger and highly significant in high RD states compared to low RD states. Also, the relation between these momentum payoffs and global economic risk appears to increase linearly in risk. Based on this evidence, we conclude that global economic risk as proxied by RD helps to explain currency momentum profits.

Keywords: Return dispersion, Momentum, Currency markets, Global economic risk

JEL Classification: G12, G14

Suggested Citation

Grobys, Klaus and Heinonen, Jari-Pekka and Kolari, James W., Is Currency Momentum a Hedge for Global Economic Risk? (December 21, 2016). Available at SSRN: https://ssrn.com/abstract=2619146 or http://dx.doi.org/10.2139/ssrn.2619146

Klaus Grobys (Contact Author)

University of Vaasa ( email )

P.O. Box 700
Wolffintie 34
FIN-65101 Vaasa
Finland

Jari-Pekka Heinonen

University of Vaasa - Department of Accounting and Finance ( email )

P.O. Box 700
FIN-65101 Vaasa, FI-65101
Finland

James W. Kolari

Texas A&M University - Department of Finance ( email )

MS-4218
Department of Finance
College Station, TX TX 77843-4218
United States
979-845-4803 (Phone)
979-845-3884 (Fax)

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