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Global Positioning Risk and FX Trading Strategies

Huichou Huang () and Lukas Menkhoff
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Huichou Huang: Jupiter Asset Management

No GRU_2018_020, GRU Working Paper Series from City University of Hong Kong, Department of Economics and Finance, Global Research Unit

Abstract: This paper proposes a new risk measure in foreign exchange, i.e. global positioning risk. Its economic intuition is derived from the standard option pricing model. We demonstrate its linkages to currency risk premia in a multi-horizon framework and by signal decomposition. This risk measure can explain a large proportion of the cross- sectional variation of currency carry, momentum, and value portfolios, respectively, and also their joint cross section with a R2 up to 80% and a t − stat of the factor price larger than four. Investing in currency markets by relying on this risk factor yields an information ratio up to 0.70 in alpha-generating strategies, and an out-of-sample Sharpe ratio up to 1.10 in portfolio optimization.

Keywords: Carry; Momentum; Value; Currency Premia; FX Options; Global Positioning Risk; Factor Investing; Portfolio Optimization (search for similar items in EconPapers)
JEL-codes: F31 G12 G15 (search for similar items in EconPapers)
Date: 2018-07-08
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