Currency momentum,carry trade,and market illiquidity |
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| Institution: | 1. American University of Beirut, Lebanon;2. Chicago State University, United States;3. Tanta University, College of Business, Tanta, Egypt;1. School of Finance and Accounting, Fuzhou University of International Studies and Trade, No. 28, Yuhuan Road, Shouzhan New District, Changle, Fuzhou City, Fujian Province, PR China;2. Department of Finance, National Sun Yat-sen University, No.70 Lien-hai Rd., Kaohsiung 804, Taiwan, ROC;1. Nottingham University Business School, University of Nottingham, NG8 1BB, United Kingdom;2. College of Business, City University of Hong Kong, Kowloon, Hong Kong;1. Haas School of Business, University of California at Berkeley, Berkeley, USA;2. NBER, USA;3. CEPR, UK;4. Department of Economics, Harvard University, Boston, USA;5. Booth School of Business, University of Chicago, Chicago, USA |
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| Abstract: | This study empirically examines the effect of equity market illiquidity on the excess returns of currency momentum and carry trade strategies. Results show that equity market illiquidity explains the evolution of currency momentum strategy payoffs, but not carry trade. Returns on currency momentum are low following months of high equity market illiquidity. However, in the recent decade, illiquidity positively predicts the associated payoffs. The findings withstand various robustness checks and are economically significant, approximating in value to one-third of average monthly profits. |
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| Keywords: | Currency momentum Carry trades Market illiquidity |
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