Currency Anomalies

78 Pages Posted: 13 Aug 2018 Last revised: 1 Jun 2020

See all articles by Söhnke M. Bartram

Söhnke M. Bartram

Warwick Business School - Department of Finance; 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 4 versions of this paper

Date Written: August 13, 2018

Abstract

This paper is the first to study the cross-section of currency anomalies to explore alternative explanations for their existence. 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. These results are consistent with a behavioral explanation for currency anomalies.

Keywords: Exchange rates, anomalies, mispricing, analysts, market efficiency, real-time, point-in-time, arbitrage costs

JEL Classification: F31, G12, G15

Suggested Citation

Bartram, Söhnke M. and Djuranovik, Leslie and Garratt, Anthony, Currency Anomalies (August 13, 2018). Available at SSRN: https://ssrn.com/abstract=3230089 or http://dx.doi.org/10.2139/ssrn.3230089

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/

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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