TY - JOUR

T1 - An integrated approach to currency factor investing

AU - Ranganathan, Ananthalakshmi

AU - Lohre, Harald

AU - Nolte, Sandra

AU - Braham, Houssem

PY - 2023/5/27

Y1 - 2023/5/27

N2 - Using the G10 currencies, we show that parametric portfolio policies can help guide an optimal currency strategy when tilting towards cross-sectional factor characteristics. While currency carry serves as the main return generator in this tilting strategy, momentum and value are implicit diversifiers to potentially balance the downside of carry investing in flight-to-quality shifts of foreign exchange investors. Drawing insights from a currency timing strategy, according to time series predictors, we further examine the parametric portfolio policy’s ability to mitigate the downside of the carry trade by incorporating an explicit currency factor timing element. This integrated approach to currency factor investing outperforms a naive equally weighted benchmark as well as univariate and multivariate parametric portfolio policies.

AB - Using the G10 currencies, we show that parametric portfolio policies can help guide an optimal currency strategy when tilting towards cross-sectional factor characteristics. While currency carry serves as the main return generator in this tilting strategy, momentum and value are implicit diversifiers to potentially balance the downside of carry investing in flight-to-quality shifts of foreign exchange investors. Drawing insights from a currency timing strategy, according to time series predictors, we further examine the parametric portfolio policy’s ability to mitigate the downside of the carry trade by incorporating an explicit currency factor timing element. This integrated approach to currency factor investing outperforms a naive equally weighted benchmark as well as univariate and multivariate parametric portfolio policies.

M3 - Journal article

VL - 3

SP - 1

EP - 25

JO - Journal of Systematic Investing

JF - Journal of Systematic Investing

IS - 1

ER -