Working Paper: CEPR ID: DP18563
Authors: Shnke Bartram; Leslie Djuranovik; Anthony Garratt; Yan Xu
Abstract: Using real-time data, we show that currency excess return predictability is in part due to mispricing. First, the risk-adjusted profitability of systematic currency trading strategies decreases after dissemination of the underlying academic research, suggesting that market participants learn about mispricing from publications. Moreover, the decline is greater for strategies with larger in-sample profits and lower arbitrage costs. Second, the effect of comprehensive risk adjustments on trading profits is limited, and signal ranks and alphas decay quickly. The finding that analysts’ forecasts are inconsistent with currency predictors implies that investors’ trading contributes to mispricing and suggests biased expectations as a possible explanation.
Keywords: No keywords provided
JEL Codes: F31; G12; G15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Research dissemination (O36) | Learning about mispricing (G19) |
| Risk adjustments (G22) | Predictor profits (G17) |
| Mispricing (G19) | Trading profitability (L21) |
| Analysts' forecasts (G17) | Market behavior (D40) |
| Signal ranks and alphas (C69) | Trading profits (D33) |
| Publication effects (E60) | Trading profits (D33) |
| Higher in-sample profits (C51) | Decline in profitability (L21) |
| Lower arbitrage costs (G19) | Decline in profitability (L21) |