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Beta’em Up: What is Market Beta in FX?

Last Updated on 10 February, 2024 by Rejaul Karim

The research paper “Beta’em Up: What is Market Beta in FX?” by Saeed Amen aims to demystify the concept of market beta in the context of foreign exchange (FX), which presents a distinct challenge compared to asset classes like equities.

The paper delves into the discussion of generic FX styles as proxies for typical FX investor returns, shedding light on the properties of a portfolio comprised of these styles.

Notably, the FX styles portfolio exhibits a commendable information ratio since 1976 and displays relatively stable returns with respect to underlying regimes in S&P500.

Furthermore, the study replicates FX fund returns using a combination of these generic FX styles, revealing the potential use of FX trend and carry as a beta for the FX market.

The examination of the relationship between bank indices and these generic FX styles adds depth to the understanding of market beta in the FX domain, highlighting significant correlations in most instances.

Abstract Of Paper

In asset classes such as equities, the market beta is fairly clear. However, this question is more difficult to answer within FX, where there is no obvious beta. To help answer the question, we discuss generic FX styles that can be used as a proxy for the returns of a typical FX investor. We also look at the properties of a portfolio of these generic styles. This FX styles portfolio has an information ratio of 0.64 since 1976. Unlike its individual components, the FX styles portfolio returns are relatively stable with respect to underlying regimes in S&P500. Later we replicate FX fund returns using a combination of these generic FX styles. We show that a combination of FX trend and carry, can be used as a beta for the FX market. Later, we examine the relationship between bank indices and these generic FX styles. We find that there is a significant correlation in most instances, with some exceptions.

Original paper – Download PDF

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Author

Saeed Amen
Cuemacro; Thalesians Ltd

Conclusion

In conclusion, the research paper “Beta’em Up: What is Market Beta in FX?” authored by Saeed Amen contributes valuable insights into the elusive concept of market beta within the foreign exchange (FX) landscape.

The study’s exploration of generic FX styles as proxies for FX investor returns and their collective portfolio characteristics provides a nuanced understanding of market dynamics. The revelation that a combination of FX trend and carry can serve as a beta for the FX market encapsulates the innovative approach of the research.

Additionally, the significant correlations identified between bank indices and generic FX styles inspire further contemplation on the intricate relationships within the FX domain.

This paper opens avenues for continued exploration into the multifaceted nature of market beta in FX, offering implications for FX investors and analysts seeking to navigate this complex market.

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Currency Momentum, Carry Trade, and Market Illiquidity

Two Centuries of Multi-Asset Momentum (Equities, Bonds, Currencies, Commodities, Sectors and Stocks)

FAQ

Q1: What is the main focus of the research paper “Beta’em Up: What is Market Beta in FX?” by Saeed Amen?

A1: The main focus of the research paper is to demystify the concept of market beta in the context of foreign exchange (FX), a challenge distinct from asset classes like equities. The paper discusses generic FX styles that can be used as proxies for typical FX investor returns and explores the properties of a portfolio composed of these styles. The goal is to understand and define market beta within the FX domain.

Q2: What are the key findings regarding the FX styles portfolio in the study?

A2: The FX styles portfolio, comprised of generic FX styles, exhibits a commendable information ratio since 1976. Unlike its individual components, the portfolio returns are relatively stable with respect to underlying regimes in the S&P500. This suggests that the combination of these styles provides a more stable representation of FX investor returns.

Q3: How does the study replicate FX fund returns, and what does it reveal about FX trend and carry as beta for the FX market?

A3: The study replicates FX fund returns using a combination of generic FX styles. It reveals that a combination of FX trend and carry can be used as a beta for the FX market. This suggests that these specific FX styles capture essential aspects of FX market returns and can serve as a benchmark or beta for FX fund performance.

You can find many more Research Papers here

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