Cross-Sectional Return Dispersion and Currency Momentum

77 Pages Posted: 18 Jul 2017 Last revised: 29 Apr 2019

Date Written: April 26, 2019

Abstract

I assess the relation between cross-sectional return dispersion in foreign exchange (FX) markets and currency momentum. I find that cross-sectional dispersion is priced in the cross-section of currency momentum returns and that an unexpected increase in cross-sectional dispersion is associated with positive (negative) excess returns to winner (loser) currencies. This mechanism can be related to monetary policy conditions. The empirical findings are robust to the inclusion of traditional currency risk factors, liquidity and market volatility variables, and transaction costs. Finally, the explanatory ability of cross-sectional dispersion extends to broader cross-sections of currency portfolios and to individual currencies.

Keywords: Foreign Exchange, Momentum, Return Dispersion, Asset Pricing

JEL Classification: F31, F37, G12, G15

Suggested Citation

Eriksen, Jonas Nygaard, Cross-Sectional Return Dispersion and Currency Momentum (April 26, 2019). Available at SSRN: https://ssrn.com/abstract=3001681 or http://dx.doi.org/10.2139/ssrn.3001681

Jonas Nygaard Eriksen (Contact Author)

Aarhus University and CREATES ( email )

Fuglesangs Alle 4
Aarhus V, 8210
Denmark

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