Positioning Risk

Abstract

Risk profiles of individual assets vary with speculative positioning. hedge fund positions in currency futures strongly predict currency betas: currencies in which speculators hold long positions comove more positively with equity markets. The link emerges after the global financial crisis, when speculators and their intermediary counterparties commonly unwind their positions with equity market shocks. My findings suggest that the scaling of futures positions in response to equity market moves translates directly into an endogenous equity market risk exposure of the currency. Compared to previously studied patterns of endogenous risks and crowded trades, these risk externalities are harder to diversify across asset classes.

Keywords: Foreign exchange, endogenous risk,

JEL Classification: F31, G11, G15