Common Macro Factors and Currency Premia

Ilias Filippou and Mark Taylor

Journal of Financial and Quantitative Analysis, 2017, vol. 52, issue 4, 1731-1763

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.

Date: 2017
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Working Paper: Common Macro Factors and Currency Premia (2014)
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