The Equity Differential Factor in Currency Markets

Financial Analysts Journal, Forthcoming

14 Pages Posted: 29 May 2019 Last revised: 30 Dec 2019

See all articles by David Turkington

David Turkington

State Street Associates

Alireza Yazdani

State Street Associates

Date Written: April 29, 2019


We show that the differential in trailing equity market performance across countries strongly predicts the cross section of currency returns. Specifically, exchange rates tend to appreciate for countries that have had the strongest equity returns in the preceding year. Implementable portfolios formed on this equity differential factor generated a return-to-risk ratio superior to the traditional carry, trend, and valuation-reversion factors in currencies since 1990. The equity differential factor cannot be explained by these traditional strategies, and produces a statistically significant alpha in excess of them. Moreover, the factor has performed remarkably consistently over time, including in recent years, and it is robust to many different formulations. We conjecture that marginal investor demand for outperforming equity markets might contribute to this effect.

Suggested Citation

Turkington, David and Yazdani, Alireza, The Equity Differential Factor in Currency Markets (April 29, 2019). Financial Analysts Journal, Forthcoming. Available at SSRN: or

David Turkington (Contact Author)

State Street Associates ( email )

United States

Alireza Yazdani

State Street Associates

140 Mount Auburn Street
Cambridge, MA 02138
United States

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