Emerging Markets Currency Factors and U.S. High-Frequency Macroeconomic Shocks

Alvero, A., & Eterovic, D. (2022). Emerging Markets Currency Factors and US High-Frequency Macroeconomic Shocks. The Journal of Portfolio Management.

The Journal of Portfolio Management Emerging Markets 2022, jpm.2022.1.370; DOI: https://doi.org/10.3905/jpm.2022.1.370

5 Pages Posted: 11 Aug 2021 Last revised: 20 Jun 2022

See all articles by Adrien Alvero

Adrien Alvero

Columbia University

Dalibor S. Eterovic

Columbia Business School; The Rohatyn Group

Date Written: February 28, 2022

Abstract

Relying on the structural vector autoregression developed by Cieslak and Pang (2021), we identify four shocks to the U.S. economy based on the U.S. Treasury yield curve and the stock market: two fundamental news shocks (growth and money) and two risk-premium shocks (common and hedging). We find that these shocks explain over 40% of the time-series variation of emerging markets currency (EMFX) returns. Additionally, EMFX returns increase significantly with positive growth shocks and decrease with monetary tightening and risk-premium shocks. We show that growth and common shocks are priced in the cross-section of EMFX, with a positive and negative risk premia, respectively. We then build long-short currency portfolios based on several academically researched style factors and test their performance and relative exposure to the macroeconomic shocks affecting the U.S. economy. We find that only Carry and Macro Momentum long-short portfolios generate positive and significant alphas and excess returns over our sample. However, all single-factor portfolios have sizable exposure to the four shocks. We show that a simple multifactor approach to investing in EMFXs eliminates the exposure of excess returns to all macroeconomic shocks.

Keywords: High-frequency shocks, emerging markets currencies, factor investing

JEL Classification: G11, G12, G15, E44

Suggested Citation

Alvero, Adrien and Eterovic, Dalibor S., Emerging Markets Currency Factors and U.S. High-Frequency Macroeconomic Shocks (February 28, 2022). Alvero, A., & Eterovic, D. (2022). Emerging Markets Currency Factors and US High-Frequency Macroeconomic Shocks. The Journal of Portfolio Management., The Journal of Portfolio Management Emerging Markets 2022, jpm.2022.1.370; DOI: https://doi.org/10.3905/jpm.2022.1.370, Available at SSRN: https://ssrn.com/abstract=3901551 or http://dx.doi.org/10.2139/ssrn.3901551

Adrien Alvero (Contact Author)

Columbia University ( email )

3022 Broadway
New York, NY 10027
United States

Dalibor S. Eterovic

Columbia Business School ( email )

3022 Broadway
New York, NY 10027
United States

The Rohatyn Group ( email )

65 East 55th Street 15th floor
New York, NY 10022
United States
19145642596 (Phone)

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