Are Carry, Momentum and Value Still There in Currencies?

Abstract

We show that carry, momentum and value predictability in currencies is associated with mispricing. Specifically, investment performance disappears subsequent to published evidence showing portfolio returns are not fully explained by risk. Replicating these studies, we show that the average out-of-sample Sharpe ratio decreases from +0.39 to -0.32. Cross sectional tests show that currencies no longer respond to interest rate and real exchange rate differentials. During this period currency excess returns do not exhibit autocorrelation. Our results are consistent with investors learning about mispricing from academic research.

Keywords: Currency return predictability, Carry, Momentum, Time series momentum, Cross sectional momentum, Value

JEL Classification: F31, G14, G19