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Global political risk and currency momentum
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Filippou, Ilias, Gozluklu, Arie Eskenazi and Taylor, Mark P. (2018) Global political risk and currency momentum. Journal of Financial and Quantitative Analysis, 53 (5). pp. 2227-2259. doi:10.1017/S0022109018000686 ISSN 0022-1090.
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Official URL: https://doi.org/10.1017/S0022109018000686
Abstract
Using a measure of political risk, relative to the United States, that captures unexpected political conditions, we show that political risk is priced in the cross section of currency momentum and contains information beyond other risk factors. Our results are robust after controlling for transaction costs, reversals, and alternative limits to arbitrage. The global political environment affects the profitability of the momentum strategy in the foreign exchange market; investors following such strategies are compensated for the exposure to the global political risk of those currencies they hold, that is, the past winners, and exploit the lower returns of loser portfolios. The risk compensation is mainly justified by the different exposures of foreign currencies in the momentum portfolio to U.S. political shocks, which is the main component of global political risk.
Item Type: | Journal Article | |||||||||
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Subjects: | H Social Sciences > HG Finance | |||||||||
Divisions: | Faculty of Social Sciences > Warwick Business School > Financial Econometrics Research Centre Faculty of Social Sciences > Warwick Business School |
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Library of Congress Subject Headings (LCSH): | Foreign exchange -- Political aspects -- Mathematical models, Country risk | |||||||||
Journal or Publication Title: | Journal of Financial and Quantitative Analysis | |||||||||
Publisher: | Cambridge University Press | |||||||||
ISSN: | 0022-1090 | |||||||||
Official Date: | 8 August 2018 | |||||||||
Dates: |
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Volume: | 53 | |||||||||
Number: | 5 | |||||||||
Page Range: | pp. 2227-2259 | |||||||||
DOI: | 10.1017/S0022109018000686 | |||||||||
Status: | Peer Reviewed | |||||||||
Publication Status: | Published | |||||||||
Reuse Statement (publisher, data, author rights): | This article has been published in a revised form in Journal of Financial and Quantitative Analysis http://doi.org/10.1017/S0022109018000686. This version is free to view and download for private research and study only. Not for re-distribution, re-sale or use in derivative works. © Michael G. Foster School of Business, University of Washington 2018 | |||||||||
Access rights to Published version: | Restricted or Subscription Access | |||||||||
Date of first compliant deposit: | 19 December 2017 | |||||||||
Date of first compliant Open Access: | 19 December 2017 | |||||||||
RIOXX Funder/Project Grant: |
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