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Economic Momentum and Currency Returns


Dahlquist, Magnus; Hasseltoft, Henrik (2015). Economic Momentum and Currency Returns. n/a n/a, University of Zurich.

Abstract

Past trends in a broad range of fundamental variables predict currency returns. We document that a trading strategy that goes long currencies in countries with strong economic momentum and short currencies in countries with weak economic momen- tum exhibits an annualized Sharpe ratio of about one and yields a significant alpha when controlling for standard carry, momentum, and value strategies. The economic momentum strategy subsumes the alpha of carry trades, suggesting that cross-country di↵erences in carry are captured by di↵erences in past economic trends. Moreover, we study investors’ expectations of fundamental variables and find the expectations to be extrapolative but negatively related to the portfolio weights, which rank economic trends across countries.

Abstract

Past trends in a broad range of fundamental variables predict currency returns. We document that a trading strategy that goes long currencies in countries with strong economic momentum and short currencies in countries with weak economic momen- tum exhibits an annualized Sharpe ratio of about one and yields a significant alpha when controlling for standard carry, momentum, and value strategies. The economic momentum strategy subsumes the alpha of carry trades, suggesting that cross-country di↵erences in carry are captured by di↵erences in past economic trends. Moreover, we study investors’ expectations of fundamental variables and find the expectations to be extrapolative but negatively related to the portfolio weights, which rank economic trends across countries.

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Additional indexing

Item Type:Working Paper
Communities & Collections:03 Faculty of Economics > Department of Banking and Finance
Dewey Decimal Classification:330 Economics
Language:English
Date:27 March 2015
Deposited On:24 Sep 2015 13:53
Last Modified:08 Dec 2017 14:08
Series Name:n/a
Other Identification Number:merlin-id:11936

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