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Cass Business School research finds that currency momentum strategies yield "striking" annual returns of 10%

Wednesday, May 02, 2012

Beverly Chandler, Opalesque London: A new study of currency momentum risk and returns shows profits are attractive but offer no free lunch for investors, says the co-author of the report, Professor Lucio Sarno of Cass Business School.

The study found that 'Cross-sectional strategies’ – where investors go long or short on a basket of currencies based on their past performance – yield the highest returns, even when accounting for transaction costs.

The study 'Currency Momentum Strategies’ by Lucio Sarno of Cass Business School, Lukas Menkhoff and Maik Schmeling of Leibniz Universitaet Hannover and Andreas Schrimpf from the Bank for International Settlements is due to be published in the Journal of Financial Economics. It was based on analysis of 48 currencies against the US dollar from 1976 to 2010. The authors claim that the research provides the most comprehensive analysis of momentum risk and returns in currency markets to date.

"We find large currency momentum strategies yield surprisingly high unconditional excess returns of up to 10% per a year," said Professor Sarno. "These returns are particularly striking given they persist in currency markets characterised by sophisticated investors, huge trading volumes, an absence of short-selling constraints and considerable central bank interference."

The study asks why does arbitrage not wipe out returns, given how easy it is to set up a momentum strategy? Th......................

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