What Drives the Profitability of Momentum Strategies?
36 Pages Posted: 2 Feb 2017 Last revised: 18 Sep 2017
Date Written: January 31, 2017
We study the predictability of exchange rates of currencies of emerging and developed economies from 1994 to 2016 to shed light on the efficiency of currency markets and how it evolved over this time. For the currencies of emerging economies, our analysis of futures returns finds some evidence of excess-predictability, especially in the earlier parts of the sample period, consistent with the view that this portion of the foreign exchange market has only become efficient in recent times. When we turn our attention to excess-returns computed from spot exchange rates and spot interest rates, however, we find much less predictability. In particular, over our full sample period, we find no evidence of excess-predictability, in contrast with the results reported by Hsu et al. (2016) but in agreement with Kuang et al. (2014).
Keywords: Predictability, Momentum, Reversal, Horizon, Safe Havens, Market Efficiency
JEL Classification: G14, E44, C58
Suggested Citation: Suggested Citation