2026/07/10 by Minyou Fan, Fearghal Kearney, Youwei Li +1 · 1 voice
Economics, Econometrics and Finance · #Monetary Policy and Economic Impact
paper · pdf · doi:10.1016/j.jimonfin.2026.103636
openalex created_date 2025/10/10 · openalex publication_date 2026/07/10 · openalex updated_date 2026/08/01
We show that a simple mean-variance (MV) optimisation can substantially enhance the performance of established currency factor strategies such as Carry, Value, and Momentum. We find that the improved performance is due to the stronger cross-sectional predictability of the optimised strategies. International diversification plays a key role in optimisation due to 1) the low correlation between developed and emerging currencies, and 2) the low level of comovement across emerging currencies. We also find that the outperformance of our proposed MV optimised factor portfolios is positively related to the standard deviation of currency abnormal returns over time. Our asset pricing tests suggest that the MV optimised factors subsume the corresponding plain currency factors.