Common Macro Factors and Currency Premia

Filippou, Ilias; Taylor, Mark P.

doi:10.1017/s0022109017000424

Cited by 27 publications

(11 citation statements)

References 74 publications

(118 reference statements)

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“…Consistent with previous studies (e.g., Burnside et al 2011 and Schrimpf (2012b) and Filippou and Taylor (2017), the momentum strategy in the all countries universe also generates considerable excess returns of 7.6% per year.…”

Section: Carry and Momentum Portfoliossupporting

confidence: 89%

US Equity Tail Risk and Currency Risk Premia

2019

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We find that a US equity tail risk factor constructed from out-of-the-money S&P 500 put option prices explains the cross-sectional variation of currency excess returns. Currencies highly exposed to this factor offer a low currency risk premium because they appreciate when US tail risk increases. In a reduced-form model, we show that country-specific tail risk factors are priced in the cross section of currency returns only if they contain a global risk component. Motivated by the intuition from the model and by our empirical results, we construct a novel proxy for a global tail risk factor by buying currencies with high US equity tail beta and shorting currencies with low US tail beta. This factor, along with the dollar risk factor, explains a large portion of the cross-sectional variation in the currency carry and momentum portfolios and outperforms other models widely used in the literature.

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Section: Carry and Momentum Portfoliossupporting

confidence: 89%

US Equity Tail Risk and Currency Risk Premia

2019

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“…We note that only global political risk exhibits significant slope estimates, indicating that it contains important information for both crosssectional and time-series currency momentum. However, it performs poorly in terms of goodness of fit as it exhibits very low R 2 , in line with earlier evidence on FX predictability (Menkhoff et al (2012b), Filippou and Taylor (2017)). In Panel B, we analyze separately loser and winner portfolios of cross-sectional momentum strategies.…”

Section: Predictive Regressionssupporting

confidence: 86%

“…However, it performs poorly in terms of goodness of fit as it exhibits very low R 2 , in line with earlier evidence on FX predictability (Menkhoff et al, 2012b;Filippou and Taylor, 2015).…”

Section: Preliminary Analysissupporting

confidence: 85%

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Global Political Risk and Currency Momentum

Filippou¹,

Gozluklu²,

Taylor³

2018

J. Financ. Quant. Anal.

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Using a measure of political risk, relative to the United States, that captures unexpected political conditions, we show that political risk is priced in the cross section of currency momentum and contains information beyond other risk factors. Our results are robust after controlling for transaction costs, reversals, and alternative limits to arbitrage. The global political environment affects the profitability of the momentum strategy in the foreign exchange market; investors following such strategies are compensated for the exposure to the global political risk of those currencies they hold, that is, the past winners, and exploit the lower returns of loser portfolios. The risk compensation is mainly justified by the different exposures of foreign currencies in the momentum portfolio to U.S. political shocks, which is the main component of global political risk.

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“…Ludvigson and Ng (2007) construct several empirical factors that summarise macro indicators and uncover a positive risk-return relation for U.S. stocks. This factor model is also useful in predicting currency carry returns (Filippou and Taylor, 2017). In contrast to the previous literature, our study predicts conditional FX market volatility by a factor model, not currency portfolio returns.…”

Section: Introductionmentioning

confidence: 70%

The conditional volatility premium on currency portfolios

Byrne

Sakemoto

2021

Journal of International Financial Markets, Institutions and Mo

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Our paper examines conditional risk-return relations in a cross-section of currency portfolios, while modeling economic states using a large number of underlying risk factors. We identify a time-varying relationship between currency returns and volatility risk: investors require a positive risk premium in many, but by no means all, time periods or investment strategies. We find that value and momentum portfolios obtained a positive risk premium during the financial crisis. Important economic states underpinning exchange rate risks include the US and global business cycles. Finally, we uncover that the risk-return relation on the momentum portfolio is counter-cyclical.

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Common Macro Factors and Currency Premia

Cited by 27 publications

References 74 publications

US Equity Tail Risk and Currency Risk Premia

US Equity Tail Risk and Currency Risk Premia

Global Political Risk and Currency Momentum

The conditional volatility premium on currency portfolios

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