Global Political Risk and Currency Momentum

95 Pages Posted: 1 Nov 2014 Last revised: 11 Mar 2016

See all articles by Ilias Filippou

Ilias Filippou

Washington University in St. Louis - John M. Olin Business School

Arie Eskenazi Gozluklu

University of Warwick

Mark P. Taylor

Washington University in St. Louis - John M. Olin Business School; Centre for Economic Policy Research (CEPR)

Date Written: March 9, 2016

Abstract

Using a measure of global political risk, relative to the U.S., 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, i.e., the past winners, and exploit the lower returns of loser portfolios.

Keywords: Currency Momentum, FX Risk premium, Limits to Arbitrage, Political Risk

JEL Classification: F31, G11, G12, G15

Suggested Citation

Filippou, Ilias and Gozluklu, Arie Eskenazi and Taylor, Mark Peter, Global Political Risk and Currency Momentum (March 9, 2016). Available at SSRN: https://ssrn.com/abstract=2517400 or http://dx.doi.org/10.2139/ssrn.2517400

Ilias Filippou (Contact Author)

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

Arie Eskenazi Gozluklu

University of Warwick ( email )

Gibbet Hill Rd
Coventry, CV4 7AL
Great Britain

HOME PAGE: http://www.arieskenazi.com

Mark Peter Taylor

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1156
St. Louis, MO 63130-4899
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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