Swing Trading Signals


Since 2013

  • 100% Quantified, data-driven and Backtested
  • We always show our results!
  • Signals every day via our site or email
  • Cancel at any time!

Currency Factors

Last Updated on 10 February, 2024 by Rejaul Karim

The research paper “Currency Factors” by Arash Aloosh and Geert Bekaert presents a meticulous investigation into the efficacy of existing and novel factor models in elucidating the co-movements of G10-currency changes, gauged through “currency baskets.”

Employing a clustering technique, the study reveals a distinct two-block structure in currency co-movements, with the first block predominantly comprising dollar currencies and the other featuring European currencies.

The research introduces a factor model integrating this “clustering” factor alongside two additional factors: a commodity currency factor and a “world” factor based on trading volumes.

Significantly, this model more effectively captures currency basket correlations compared to prevailing factors such as value and carry, explaining approximately 60% of currency variation and demonstrating a meager root mean squared error relative to sample correlations.

Furthermore, the model adeptly accounts for co-movements in emerging market currencies. Economically, the correlations between currency baskets, underpinning the factor structure, evince an inverse relationship with the physical distances between countries.

Abstract Of Paper

We examine the ability of existing and new factor models to explain the comovements of G10-currency changes, measured using “currency baskets.” A clustering technique reveals a clear two-block structure in currency comovements with the first block containing mostly the dollar currencies, and the other the European currencies. A factor model incorporating this “clustering” factor and two additional factors, a commodity currency factor and a “world” factor based on trading volumes, fits currency basket correlations much better than extant factors, such as value and carry, do. In particular, it explains on average about 60% of currency variation and generates a root mean squared error relative to sample correlations of only 0.11. The model also fits comovements in emerging market currencies well. Economically, the correlations between currency baskets underlying the factor structure are inversely related to the physical distances between countries.

Original paper – Download PDF

Here you can download the PDF and original paper of Currency Factors.

(An option to download will come shortly)

Author

Arash Aloosh
EMLV Business School Paris

Geert Bekaert
Columbia University – Columbia Business School, Finance

Conclusion

In conclusion, the research paper “Currency Factors” by Arash Aloosh and Geert Bekaert offers a comprehensive exploration of the potential and effectiveness of prevailing and innovative factor models in elucidating co-movements of G10-currency changes using “currency baskets.”

The study’s employment of a clustering technique delineates a discernible two-block structure within currency co-movements, distinguishing dollar currencies from their European counterparts.

By incorporating a “clustering” factor, as well as commodity currency and “world” factors, the model outperforms traditional factors like value and carry, explaining almost 60% of currency variation and demonstrating minimal error in relation to sample correlations.

Furthermore, the model adeptly captures co-movements in emerging market currencies. The research’s unique economic insights unveil an inverse relationship between currency basket correlations and the physical distances between countries, underscoring the complex interplay of geography and currency dynamics.

These findings establish a novel framework for comprehending and modeling currency co-movements, thereby enriching our understanding of global currency markets.

Related Reading:

Global Equity Correlation in International Markets

Cross-Sectional Return Dispersion and Currency Momentum

FAQ

Q1: What is the main focus of the research paper “Currency Factors” by Arash Aloosh and Geert Bekaert?

A1: The main focus of the research paper is to examine the efficacy of existing and novel factor models in explaining the co-movements of G10-currency changes, measured using “currency baskets.”

Q2: What is the key insight obtained through the clustering technique employed in the study?

A2: The clustering technique reveals a distinct two-block structure in currency co-movements. The first block predominantly comprises dollar currencies, while the second block features European currencies. This insight helps in understanding the underlying structure of currency co-movements.

Q3: What factors are integrated into the proposed factor model, and how do they contribute to explaining currency basket correlations?

A3: The proposed factor model integrates three factors: a “clustering” factor, a commodity currency factor, and a “world” factor based on trading volumes. These factors collectively contribute to explaining currency basket correlations more effectively than traditional factors such as value and carry.

Find A Comprehensive Database of Research Papers On Trading Strategies here

Leave a Reply

{"email":"Email address invalid","url":"Website address invalid","required":"Required field missing"}

Monthly Trading Strategy Club

$42 Per Strategy

>

Login to Your Account



Signup Here
Lost Password