Currency Factors

61 Pages Posted: 23 Jan 2019

See all articles by Arash Aloosh

Arash Aloosh

Neoma Business School

Geert Bekaert

Columbia Business School - Finance and Economics

Multiple version iconThere are 3 versions of this paper

Date Written: January 2019


We examine the ability of existing and new factor models to explain the comovements of G10- currency changes, measured using the novel concept of "currency baskets", representing the overall movement of a particular currency. Using a clustering technique, we find a clear two-block structure in currency comovements with the first block containing mostly the dollar currencies, and the other the European currencies. A factor model incorporating this "clustering" factor and two additional factors, a commodity currency factor and a "world" factor based on trading volumes, fits currency basket correlations much better than extant factors, such as value and carry, do. In particular, it explains on average about 60% of currency variation and generates a root mean squared error relative to sample correlations of only 0.11. The model also fits comovements in emerging market currencies well. Economically, the correlations between currency baskets underlying the factor structure are inversely related to the physical distances between countries. The factor structure is also related to the exposure of the corresponding pricing kernels with respect to the global pricing kernel and is apparent in cross-country retail sales growth data.

Keywords: clustering, Currency Baskets, Currency Comovements, Currency Factors, factor models, Global Pricing Kernels

JEL Classification: C23, C53, G11

Suggested Citation

Aloosh, Arash and Bekaert, Geert, Currency Factors (January 2019). CEPR Discussion Paper No. DP13464, Available at SSRN:

Arash Aloosh (Contact Author)

Neoma Business School ( email )

1 Rue du Maréchal Juin,
Mont Saint Aignan, 76130
+33232824736 (Phone)

Geert Bekaert

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States

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