ScienceDirect Publication: Journal of Empirical Finance
Mon, 30 Sep 2019 13:02:49 GMT language
Publication date: September 2019
Source: Journal of Empirical Finance, Volume 53
Author(s): Jonas N. Eriksen
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.