Foreign Exchange

Centro de Finanças e Macroeconomia

Last update: 17/8/2022

Author: Igor Martins

We provide risk factors and portfolios used by researchers and practitioners in the study of exchange rate returns. Below we list the factors as well as the paper that describe the methodology:

  • Dollar (factor) and HML (factorportfolio)  – Lustig, Roussanov and Verdelhan (2011)¹
    • Dollar contains information
    • HML is separated into quintiles and factor is constructed from the difference of highest interest rate countries minus lowest interest countries (quintile 1 – quintile 5)
  • Momentum (factorportfolio) – Menkhoff, Sarno, Schmeling and Schrimpf (2012)²
    • Momentum is separated into quintiles and factor is constructed from the difference of highest momentum minus lowest momentum

Cumulative Return for Dollar and HML Factors

We estimate the factors using the exchange rate of the following currencies with respect to USD: EUR, JPY, GBP, CAD, AUD, NZD, CHF, DKK, NOK and SEK. We each paper’s methodology to separate portfolios. Factor is the difference between two portfolios. Downloadable dataset is daily.

If you have any doubt or comments please e-mail us at cefim@insper.edu.br

References:

¹Lustig, Roussanov and Verdelhan, 2011 – Common Risk Factors in Currency Markets

²Menkhoff, Sarno, Schmeling and Schrimpf, 2012 – Currency Momentum Strategies