Dissecting Currency Momentum

Fisher College of Business Working Paper No. 2020-03-015

Charles A Dice Working Paper No. 2020-15

42 Pages Posted: 7 Jul 2020 Last revised: 24 Jun 2023

Multiple version iconThere are 2 versions of this paper

Date Written: July 20, 2020

Abstract

This paper shows that the cross-sectional and time series momentum in currencies, which cannot be explained by carry and dollar factors, summarize the autocorrelation of these factors. These momentum strategies long currency factors following positive factor returns and short them following losses. Carry and dollar factors are strongly autocorrelated and only earn significantly positive excess returns following positive factor returns. In contrast, idiosyncratic currency returns contain little momentum. Consequently, factor momentum not only outperforms the cross-sectional and time series momentum but also explains them. Limits to arbitrage and time-varying risk premium help explain factor momentum.

Keywords: momentum, return, factor, exchange rate

JEL Classification: F0, F3, G0, G1

Suggested Citation

Zhang, Shaojun, Dissecting Currency Momentum (July 20, 2020). Fisher College of Business Working Paper No. 2020-03-015, Charles A Dice Working Paper No. 2020-15, Available at SSRN: https://ssrn.com/abstract=3643855 or http://dx.doi.org/10.2139/ssrn.3643855

Shaojun Zhang (Contact Author)

The Ohio State University

2100 Neil Avenue
Columbus, OH 43210-1144
United States

HOME PAGE: http://sites.google.com/view/zhangshaojun

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