Currency Momentum Strategies

Lukas Menkhoff Lucio Sarno Maik Schmeling
4 Authors
PDF (89 Pages)
Type
Publication
Series
BIS Working Paper 366
Date Published
13 December 2011
Sources
Bank for International Settlements
JEL Classification
F31
G12
G15

Abstract:

We provide a broad empirical investigation of momentum strategies in the foreign exchange market. We find a signiffcant cross-sectional spread in excess returns of up to 10% p.a. between past winner and loser currencies. This spread in excess returns is not explained by traditional risk factors, it is partially explained by transaction costs and shows behavior consistent with investor under- and over-reaction. Moreover, crosssectional currency momentum has very different properties from the widely studied carry trade and is not highly correlated with returns of benchmark technical trading rules. However, there seem to be very effective limits to arbitrage which prevent momentum returns from being easily exploitable in currency markets.

The views expressed in this publication are those of the authors and do not necessarily reflect the views of the BIS or its member central banks.
PDF (89 Pages)

Authors

Lukas Menkhoff

Professor of Economics
Lucio Sarno

Professor of Finance, Head of Faculty
Maik Schmeling
Andreas Schrimpf
Andreas Schrimpf

Head of Financial Markets

Monetary and Economic Department, Financial Markets