Journal of Financial and Quantitative Analysis Vol. 52 No. 4 2017
Common Macro Factors and Currency Premia
Abstract
We study the role of domestic and global factors in the payoffs of portfolios mimicking carry, dollar-carry, and momentum strategies. Using factors summarizing large data sets of macroeconomic and financial variables, we find that global equity-market factors are predictive for carry-trade returns, whereas U.S. inflation and consumption variables drive dollar-carry-trade payoffs, momentum returns are predominantly driven by U.S. inflation factors, and global factors capture the countercyclical nature of currency premia. We also find predictability in the exchange-rate component of each strategy and demonstrate strong economic value for risk-averse investors with mean-variance preferences, regardless of base currency.
- DOI
- 10.1017/s0022109017000424
- Volume
- 52
- Issue
- 4
- Pages
- 1731-1763
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref