Cross-Sectional Return Dispersion and Currency Momentum
61 Pages Posted: 18 Jul 2017 Last revised: 6 Sep 2018
Date Written: August 16, 2018
I investigate the relation between cross-sectional return dispersion in foreign exchange (FX) markets and the cross-section of currency momentum excess returns. I find that a dispersion factor, which captures unexpected changes to the aggregate amount of heterogeneity in currency returns, is priced in the cross-section of currency momentum returns and that it contains information beyond traditional risk factors. Currencies with high past returns (winners) load positively on dispersion innovations, whereas currencies with low past returns (losers) load negatively. The main results are robust to the inclusion of transaction costs, using individual currencies, and a subsample of developed countries.
Keywords: Foreign Exchange, Momentum, Return Dispersion, Asset Pricing
JEL Classification: F31, F37, G12, G15
Suggested Citation: Suggested Citation