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Common Macro Factors and Currency Premia

Published online by Cambridge University Press:  15 August 2017

Ilias Filippou  and
Mark P. Taylor
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Abstract

We study the role of domestic and global factors in the payoffs of portfolios mimicking carry, dollar-carry, and momentum strategies. Using factors summarizing large data sets of macroeconomic and financial variables, we find that global equity-market factors are predictive for carry-trade returns, whereas U.S. inflation and consumption variables drive dollar-carry-trade payoffs, momentum returns are predominantly driven by U.S. inflation factors, and global factors capture the countercyclical nature of currency premia. We also find predictability in the exchange-rate component of each strategy and demonstrate strong economic value for risk-averse investors with mean-variance preferences, regardless of base currency.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 52 , Issue 4 , August 2017 , pp. 1731 - 1763
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2017 

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Footnotes

1

We thank Stephen Brown (the editor) and Richard Levich (the referee) for helpful and constructive comments on a previous version of this article. We are also grateful to Söhnke Bartram, Andrew Karolyi, Leonid Kogan, Michael Melvin, Michael Moore, Ingmar Nolte, Alessandro Palandri, Jon Rushman, Gideon Saar, Alex Stremme, Avanidhar Subrahmanyam, David Thesmar, and seminar participants at the Warwick Business School Finance Workshop, the 2013 International Conference of the Financial Engineering and Banking Society (FEBS) at the ESCP Europe Paris Campus, and the 2015 Inquire Business School Seminar at Warwick Business School at the Shard for useful conversations and comments. The financial support of the U.K. Economic and Social Research Council is also gratefully acknowledged.

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