DP15653 Currency Anomalies

Author(s): Söhnke M Bartram, Leslie Djuranovik, Anthony Garratt
Publication Date: January 2021
Date Revised: May 2021
Keyword(s): Analysts, Anomalies, arbitrage costs, Exchange Rates, IPCA, Market Efficiency, mispricing, predictors, principal components, Real-time
JEL(s): F31, G12, G15
Programme Areas: Financial Economics, International Macroeconomics and Finance
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=15653

This paper is the first to study the cross-section of currency excess return predictors to explore alternative explanations for their existence. Using real-time data, quantitative currency trading strategies are profitable during in-sample and out-of-sample periods, even after transaction costs and comprehensive risk adjustments. However, (risk-adjusted) profits decrease substantially after the publication of the underlying academic research. In line with predictor profits reflecting mispricing, the decline is greater for strategies with larger in-sample profits and lower arbitrage costs. Moreover, the effect of risk adjustments on trading profits is limited, and signal ranks and alphas decay quickly. While analysts' currency forecasts are inconsistent with currency predictors, analysts update their forecasts quickly to incorporate lagged predictor information. The results suggest that market participants learn about mispricing from academic publications, while contributing to it when following analysts' forecasts.