Currency Management

How to harvest currency alpha - momentum, carry or value?

Some of our most popular currency white papers are those which consider the user of factor models in managing currency exposures.

What works best: momentum, value or carry? A combination of all three? Or different factors in different environments.

These papers try to answer the key questions.

1. Value and Momentum Everywhere (Asness et Al)

Value and momentum are well-known to be useful indicators in equity markets, but can they be used to generate currency alpha? This paper analyses risk premia for value and momentum returns across a variety of different asset classes, including currencies. The authors find that across every asset class, returns are driven by common risk factors.

2. The "Carry Factor" and Common Risk Factors in Currency Markets (NBER)

This paper from NBER examines the "carry" factor - interest-rate differentials within currency markets. The authors' research derives a ‘slope’ factor for FX rates, which explains why high interest rate currency returns tend to exceed those from low interest rate currencies.

3. Risk Premia Harvesting Through Dual Momentum (Gary Antonacci)

Gary Antonacci has published many papers on the use of momentum in tactical asset allocation. In this paper he seeks to find the optimal strategy for momentum investors, by analyzing cross-asset momentum and price volatility.

Antonacci examines measures of absolute and relative momentum, finding that both measures can genrate alpha. Using the "absolute momentum" indicator improves the return/risk trade-off, with returns exhibiting lower volatility and smaller draw-downs. However, better results are achieved by combining both indicators.