Cross-sectional return dispersion and currency momentum

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Abstract

I assess the relation between cross-sectional return dispersion in foreign exchange (FX) markets and currency momentum. I find that cross-sectional dispersion is priced in the cross-section of currency momentum returns and that an unexpected increase in cross-sectional dispersion is associated with positive (negative) excess returns to winner (loser) currencies. This mechanism can be related to monetary policy conditions. The empirical findings are robust to the inclusion of traditional
currency risk factors, liquidity and market volatility variables, and transaction costs. Finally, the explanatory ability of cross-sectional dispersion extends to broader cross-sections of currency portfolios and to individual currencies.
Original languageEnglish
JournalJournal of Empirical Finance
Volume53
Pages (from-to)91-108
Number of pages18
ISSN0927-5398
DOIs
Publication statusPublished - 2019

Keywords

  • Foreign exchange
  • currency momentum
  • return dispersion
  • asset pricing

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