Currency Anomalies

72 Pages Posted: 26 Apr 2018 Last revised: 9 Jul 2019

See all articles by Söhnke M. Bartram

Söhnke M. Bartram

Warwick Business School - Department of Finance

Leslie Djuranovik

Bank Indonesia - Department of Economic and Monetary Policy; Warwick Business School - Department of Finance

Anthony Garratt

University of Warwick

Multiple version iconThere are 3 versions of this paper

Date Written: January 8, 2018

Abstract

Using real-time data, currency anomalies are profitable during in-sample and out-of-sample periods, both before and after transaction costs, but trading profits decrease substantially after the publication of the underlying academic research. The decline is greater for anomalies with larger in-sample profits and lower arbitrage costs, and signal ranks and performance decay quickly, suggesting that currency anomalies reflect mispricing rather than compensation for risk or statistical bias. Mispricing is systematically related to mistakes and changes in analysts’ currency forecasts. In particular, analysts expect anomaly payoffs that are too low compared with actual anomaly profits. However, analysts update their forecasts to incorporate lagged anomaly information, and their mistakes become smaller over time. These results are consistent with a behavioral explanation for currency anomalies.

Keywords: Exchange Rates, Anomalies, Mispricing, Analysts, Market Efficiency, Real-Time, Point-In-Time

JEL Classification: F31, G12, G15

Suggested Citation

Bartram, Söhnke M. and Djuranovik, Leslie and Garratt, Anthony, Currency Anomalies (January 8, 2018). Available at SSRN: https://ssrn.com/abstract=3194107 or http://dx.doi.org/10.2139/ssrn.3194107

Söhnke M. Bartram (Contact Author)

Warwick Business School - Department of Finance ( email )

Coventry, CV4 7AL
United Kingdom
+44 (24) 7657 4168 (Phone)
+1 425 952 1070 (Fax)

HOME PAGE: http://go.warwick.ac.uk/sbartram/

Leslie Djuranovik

Bank Indonesia - Department of Economic and Monetary Policy ( email )

Jakarta, 10350
Indonesia

Warwick Business School - Department of Finance ( email )

Coventry, CV4 7AL
United Kingdom

Anthony Garratt

University of Warwick ( email )

West Midlands, CV4 7AL
United Kingdom

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