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How to maximize momentum returns in foreign exchange Markets?

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Listed:
  • Liu, Yi

Abstract

This paper examines momentum and reversal patterns in forex markets using data from 42 countries. First, robust momentum effects exist in currency returns over six-month holding periods, and these are systematically followed by return reversals in subsequent months. More importantly, these momentum and reversal effects originate from distinct subsets of currencies, suggesting momentum and reversal should not be viewed as sequential phases in the lifecycle of the same currency pairs. Next, this paper shows that double-sorting currencies based on skewness or kurtosis allow investors to construct momentum portfolios that improve returns compared to conventional momentum strategies. In contrast, volatility-based sorting approaches fail to deliver similar performance enhancements. Furthermore, double-sorted strategies based on skewness or kurtosis show consistent performance during recessions, with robust improvement no matter when investors form their portfolios. These findings have important implications for both asset pricing theory and forex market practice. The results challenge simple risk-based explanations for currency momentum and offer a concrete approach to improve trading performance.

Suggested Citation

  • Liu, Yi, 2026. "How to maximize momentum returns in foreign exchange Markets?," Journal of International Money and Finance, Elsevier, vol. 164(C).
    • Handle: RePEc:eee:jimfin:v:164:y:2026:i:c:s0261560626000513
    DOI: 10.1016/j.jimonfin.2026.103566

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    Keywords

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    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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