Momentary Loss: The Disappearance of Cross-Sectional Currency Momentum

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School of Business | Bachelor's thesis
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Date

2025

Department

Rahoituksen laitos

Major/Subject

Mcode

Degree programme

Rahoitus

Language

en

Pages

21+8

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Abstract

This thesis examines cross-sectional currency momentum strategy returns from January 2010 to January 2025. The effective sample set includes end-of-month price data for 32 global currencies. To measure momentum, long-minus-short portfolios are formed, where the long component represents the average return of best-performing currencies, and the short component represents the average return of worst-performing currencies for each formation period. The holding and formation periods considered are 1, 3, 6, 9, and 12 months, resulting in 25 distinct cross-sectional momentum long-minus-short portfolios. In addition, spot rate changes are analysed for each portfolio. The results show no statistically significant excess returns for any of the 25 portfolios, even after accounting for transaction costs and spot rate changes. The findings suggest that momentum strategy returns have largely disappeared following the Global Financial Crisis, possibly due to increased arbitrage or volatile macroeconomic conditions. The thesis contributes to the literature on cross-sectional currency momentum strategies and their relevance in modern currency markets.

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Thesis advisor

Korhonen, Anniina

Keywords

momentum portfolios, currencies, anomaly, covered interest rate parity

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https://urn.fi/URN:NBN:fi:aalto-202505183781

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[kand] Kauppakorkeakoulu / BIZ