A Low-Risk Strategy Based on Higher Moments in Currency Markets
59 Pages Posted: 28 Sep 2015 Last revised: 30 May 2016
Date Written: May 29, 2016
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: Suggested Citation