Cross-Sectional Return Dispersion and Currency Momentum
77 Pages Posted: 18 Jul 2017 Last revised: 29 Apr 2019
Date Written: April 26, 2019
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: Suggested Citation