Conditional currency momentum portfolios

Abstract

Currency momentum portfolios have not generated positive returns after the global financial crisis. We propose conditional currency momentum strategies that incorporate information about the average forward discount, the currency market volatility, and the return dispersion of currency portfolios. Our strategy goes long in the momentum portfolio only when the average forward discount is positive, the volatility is low, and the return dispersion is low. We reveal that the conditional one-month currency momentum portfolio raises the Sharpe ratio by 0.69 and the certainty equivalent return by 6.6 % per annum.