6533b85dfe1ef96bd12be6c7
RESEARCH PRODUCT
Identifying Portfolio-Based Risk Factors in Foreign Exchange Markets
Klaus GrobysKlaus Grobyssubject
Momentum (finance)Carry (investment)CurrencyStochastic discount factorEconomicsEconometricsPortfolioCapital asset pricing modelRisk factor (finance)Foreign exchange marketdescription
This paper shows that a link between the conditional mean and conditional volatility of any factor-mimicking portfolio in the foreign exchange (FX) market must exist if the proposed portfolio-based currency factor is priced and the pricing kernel has a linear factor structure. Thereby, this paper tests whether the carry risk factor and currency momentum are priced risk factors. Surprisingly, the carry risk factor does not meet the necessary conditions consistent with being a priced risk factor, whereas currency momentum indeed meets those criteria. The findings also indicate that the relation between the conditional mean and conditional risk is moreover economically reasonable for the currency momentum portfolio.
| year | journal | country | edition | language |
|---|---|---|---|---|
| 2018-01-01 | SSRN Electronic Journal |