Are Value Strategies Profitable in the Foreign Exchange Market?

35 Pages Posted: 4 Feb 2015 Last revised: 28 Jul 2016

See all articles by Ahmad Raza

Ahmad Raza

University of Otago - Department of Accountancy and Finance

Date Written: October 19, 2015

Abstract

This paper examines the profitability of value strategies based on four different measures of currency valuation. Real exchange rate level strategies generate the largest excess returns on intervals up to 1 month, while real exchange rate changes produce the largest excess returns for intervals of 1-12 months. Purchasing power parity and Big-Mac index based strategies underperform. The returns are not explained by economic state variables or currency risk factors and are larger than estimated transaction costs. A composite strategy based on all four valuation approaches produces superior mean returns but volatility is also higher due to portfolio concentration.

Keywords: Currency, value strategies, real exchange rate, purchasing power parity, Big-Mac Index

JEL Classification: F31, G15

Suggested Citation

Raza, Ahmad, Are Value Strategies Profitable in the Foreign Exchange Market? (October 19, 2015). 28th Australasian Finance and Banking Conference. Available at SSRN: https://ssrn.com/abstract=2559375 or http://dx.doi.org/10.2139/ssrn.2559375

Ahmad Raza (Contact Author)

University of Otago - Department of Accountancy and Finance ( email )

PO Box 56
Dunedin, 9054
New Zealand

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