Currency Anomalies

80 Pages Posted: 26 Apr 2018 Last revised: 4 Oct 2022

See all articles by Söhnke M. Bartram

Söhnke M. Bartram

University of Warwick; Centre for Economic Policy Research (CEPR)

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 5 versions of this paper

Date Written: January 8, 2018

Abstract

This paper is the first to study the cross-section of currency excess return predictors. Using real-time data, the results provide evidence that currency excess return predictability is at least in part due to mispricing. First, the risk-adjusted profitability of systematic currency trading strategies decreases significantly after the publication of the underlying academic research, suggesting that market participants learn about mispricing from research publications. Consistent with mispricing, the decline is greater for strategies with larger in-sample profits and lower arbitrage costs. Second, the effect of comprehensive, state-of-the art risk adjustments on trading profits is limited, and signal ranks and alphas decay quickly. Third, in line with biased expectations as opposed to risk as a source of return predictability, analysts’ forecasts are inconsistent with currency predictors, implying that investors trading on them contribute to mispricing.

Keywords: Predictors, anomalies, mispricing, analysts, market efficiency, real-time, point-in-time, arbitrage costs, IPCA, instrumented principal components analysis, principal components

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)

University of Warwick ( email )

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

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

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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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