Working Paper: CEPR ID: DP10016
Authors: Ilias Filippou; Mark P. Taylor
Abstract: We study the role of domestic and global factors on payoffs of portfolios built to mimic carry, dollar carry and momentum strategies. We construct domestic and global factors from a large dataset of macroeconomic and financial variables and find that global equity market factors render strong predictive power for carry trade returns, while U.S. inflation and consumption variables drive dollar carry trade payoffs and momentum returns are driven by global commodity and U.S. inflation factors. We find evidence of predictability in the exchange rate component of each strategy and demonstrate strong economic value to a risk-averse investor with mean-variance preferences.
Keywords: carry trade; factor analysis; foreign exchange; forward premium puzzle; momentum
JEL Codes: F31; G11; G15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| global factors (F69) | carry trade returns (G15) |
| US inflation (E31) | dollar carry trade payoffs (F31) |
| US consumption (E20) | dollar carry trade payoffs (F31) |
| global commodity factors (Q02) | momentum returns (C69) |
| US inflation (E31) | momentum returns (C69) |