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: 2 Jan 2021

See all articles by Shaojun Zhang

Shaojun Zhang

The Ohio State University; The Vanguard Group, Inc.

Multiple version iconThere are 2 versions of this paper

Date Written: July 20, 2020

Abstract

This paper shows that currency momentum, which cannot be explained by carry and dollar factors, summarizes the autocorrelation of these factors. Carry and dollar factors are strongly autocorrelated and only earn significantly positive excess returns following positive factor returns. Currency momentum longs the factors following positive factor returns and shorts them following losses. Factor momentum not only outperforms currency momentum but also explains it, whereas idiosyncratic returns do not contain or explain momentum. Further evidence shows that factor momentum is inconsistent with the time-varying risk premium but supports mispricing. In particular, the mispricing prevails across markets.

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

The Vanguard Group, Inc. ( email )

100 Vanguard Blvd
Malvern, PA 19355
United States

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