Dissecting Currency Momentum
51 Pages Posted: 28 Jan 2021 Last revised: 30 Mar 2021
Date Written: January 27, 2021
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, time series momentum, return, factor, exchange rate
JEL Classification: F0, F3, G0, G1
Suggested Citation: Suggested Citation