Dissecting Currency Momentum

51 Pages Posted: 28 Jan 2021 Last revised: 30 Mar 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: January 27, 2021

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, time series momentum, return, factor, exchange rate

JEL Classification: F0, F3, G0, G1

Suggested Citation

Zhang, Shaojun, Dissecting Currency Momentum (January 27, 2021). Available at SSRN: https://ssrn.com/abstract=3759017 or http://dx.doi.org/10.2139/ssrn.3759017

Shaojun Zhang (Contact Author)

The Ohio State University

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Columbus, OH 43210-1144
United States

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

The Vanguard Group, Inc. ( email )

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Malvern, PA 19355
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