Understanding the Performance of Currency Basis‐Momentum

ABSTRACT We conduct an in‐depth analysis of basis momentum (BM) in currency markets and examine its relationship with key market anomalies. We find that BM strategies generate significant excess returns across various formation periods. These abnormal returns are not fully explained by the closely related carry and momentum factors. By decomposing the BM signal, we show that both carry‐ and momentum‐related components contribute to the returns of BM strategies. Compared to carry trade, BM strategies exhibit significantly lower risk, leading to superior risk‐adjusted performance.