Accessing Currency Returns Through Intelligence Currency Factors
14 Pages Posted: 5 Feb 2020
Date Written: December 1, 2019
This paper presents a methodology for the construction of three “intelligent” currency beta factors based around the popular trading styles of carry, value, and trend/momentum together with a multi-style factor combining all three. The methodology is termed “intelligent” because we demonstrate how, in the case of the carry factor, applying a binary filter to determine risk environment and adjusting trade sizes in periods of risk aversion can lead to improved drawdown and enhanced performance statistics versus more naïve carry factors. In addition, for all three single-style factors we demonstrate how establishing a relationship between the resulting trade weight per currency and the magnitude of the underlying trade signal’s information coefficient can enhance performance versus other currency beta factors that apply an equal trading weight per currency regardless of the strength of signal.
Keywords: currency risk, currency factors
JEL Classification: G12, G15
Suggested Citation: Suggested Citation