Faculty of Economics and Business Administration Publications Database

Currency Momentum Strategies

Menkhoff, Lukas
Sarno, Lucio
Schrimpf, Andreas
Volume: 106
Number: 3
Pages: 660 - 684
Month: December
ISSN-Print: 0304-405X
Link External Source: Online Version
Year: 2012
Keywords: Momentum returns; Limits to arbitrage; Idiosyncratic volatility; Carry trades

We provide a broad empirical investigation of momentum strategies in the foreign exchange market. We find a significant cross-sectional spread in excess returns of up to 10% per annum (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 overreaction. Moreover, cross-sectional 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 that prevent momentum returns from being easily exploitable in currency markets.