A Low-Risk Strategy Based on Higher Moments in Currency Markets

59 Pages Posted: 28 Sep 2015 Last revised: 30 May 2016

See all articles by Claudia Zunft

Claudia Zunft

Goethe University Frankfurt - Department of Finance

Date Written: May 29, 2016

Abstract

This paper is first to establish profound evidence on the existence of a low-risk anomaly in currency markets. In particular, I discover a novel strategy in currency forward markets that is long in currencies whose higher return moments are low relative to past levels and short in currencies whose higher return moments are high relative to past levels. The low-risk strategy based on higher moments is not spanned by traditional currency strategies. In a sample of roughly 25 years, it provides the highest mean excess payoff and Sharpe ratio as well as the smallest drawdown in comparison to them. The profitability of the strategy is not explained by standard risk factors and limits-to-arbitrage.

Keywords: low-risk anomaly, higher moments, currencies, factor portfolios

JEL Classification: F31, F37, G12, G15, G17

Suggested Citation

Zunft, Claudia, A Low-Risk Strategy Based on Higher Moments in Currency Markets (May 29, 2016). Available at SSRN: https://ssrn.com/abstract=2666223 or http://dx.doi.org/10.2139/ssrn.2666223

Claudia Zunft (Contact Author)

Goethe University Frankfurt - Department of Finance ( email )

Mertonstr. 17
Frankfurt, 60054
Germany

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