Currency Anomalies

82 Pages Posted: 11 Feb 2021 Last revised: 14 May 2021

See all articles by Söhnke M. Bartram

Söhnke M. Bartram

University of Warwick; 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 5 versions of this paper

Date Written: January 2021

Abstract

This paper is the first to study the cross-section of currency excess return predictors to explore alternative explanations for their existence. Using real-time data, quantitative currency trading strategies are profitable during in-sample and out-of-sample periods, even after transaction costs and comprehensive risk adjustments. However, (risk-adjusted) profits decrease substantially after the publication of the underlying academic research. In line with predictor profits reflecting mispricing, the decline is greater for strategies with larger in-sample profits and lower arbitrage costs. Moreover, the effect of risk adjustments on trading profits is limited, and signal ranks and alphas decay quickly. While analysts' currency forecasts are inconsistent with currency predictors, analysts update their forecasts quickly to incorporate lagged predictor information. The results suggest that market participants learn about mispricing from academic publications, while contributing to it when following analysts' forecasts.

JEL Classification: F31, G12, G15

Suggested Citation

Bartram, Söhnke M. and Djuranovik, Leslie and Garratt, Anthony, Currency Anomalies (January 2021). CEPR Discussion Paper No. DP15653, Available at SSRN: https://ssrn.com/abstract=3783885

Söhnke M. Bartram (Contact Author)

University of Warwick ( email )

Warwick Business School
Finance Group
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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