Abstract The paper introduces a novel two-beta currency pricing model, which decomposes the conventional dollar factor beta into a beta with risk-premium news and a beta with real-interest-rate news. These betas capture distinct features of currency returns and explain cross-sectional variations in currency risk premiums. The risk-premium beta is associated with an unconditionally positive price of risk, while the real-rate beta has an unconditionally negative price of risk due to precautionary savings. The prices of these beta risks exhibit conditional variations tied to economic conditions. Furthermore, the model explains the abnormal performance of various currency trading strategies.

This study investigates the performance of trend factors across different markets around the world and demonstrates that the trend factors perform well across most of developed markets and many emerging markets, outperforming the market portfolio, short-term reversal, momentum, and long-term reversal. We further examine how cultural and legal differences influence the performance of the trend factor trading strategy and find it is more profitable in countries where the individualism is higher and securities laws are better enforced. Finally, the global trend factor aggregating individual market trend factors performs well and explains various global portfolios’ returns. The findings suggest that the trend factors present a challenge to traditional risk-based asset pricing theories, and trend factor trading strategies may deserve more attention in international portfolio management.