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Common Macro Factors and Currency Premia

Ilias Filippou and Mark Taylor ()

No 10016, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We study the role of domestic and global factors on payoffs of portfolios built to mimic carry, dollar carry and momentum strategies. We construct domestic and global factors from a large dataset of macroeconomic and financial variables and find that global equity market factors render strong predictive power for carry trade returns, while U.S. inflation and consumption variables drive dollar carry trade payoffs and momentum returns are driven by global commodity and U.S. inflation factors. We find evidence of predictability in the exchange rate component of each strategy and demonstrate strong economic value to a risk-averse investor with mean-variance preferences.

Keywords: Carry Trade; Factor Analysis; Foreign Exchange; Forward Premium Puzzle; Momentum (search for similar items in EconPapers)
JEL-codes: F31 G11 G15 (search for similar items in EconPapers)
Date: 2014-06
New Economics Papers: this item is included in nep-ifn and nep-mon
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