Working Papers
Currency Speculation
with Pasquale Della Corte (Imperial). Latest version: November 2025.
Prepared for the Annual Review of Financial Economics
Currency data is available at our dedicated website: www.currencyfactors.com
Abstract. Over the past two decades, a growing body of research has documented profitable currency investment strategies. Beginning with the carry trade, the literature has expanded in multiple directions, uncovering diverse sources of excess return predictability linked to prices, trading volumes, and economic fundamentals. This article first reviews this burgeoning literature and provides a framework to organize its key strands for both academics and practitioners. We then turn to the often-overlooked issue of sample selection. Much of the existing work adopts an ad hoc approach to defining the currency universe. We show that strategy performance varies considerably across different currency subsamples. In particular, restricting the sample to countries with open capital accounts and liquid, floating currencies produces substantially weaker returns than when all currencies are included. Nonetheless, we find that combining strategies---regardless of the sample---yields improved and broadly comparable investment performance.
On the Use of Currency Forwards: Evidence from International Equity Mutual Funds
with Wei Opie (Deakin). Latest version: November 2025.
Winner of the 2023 Hillsdale Investment Management - CFA Society Toronto Research Award
Winner of the 2023 FIRN Asset Management Meeting Best Paper Award.
Presentations: 2024 Northern Finance Association Annual Meeting, the 6th Conference on ``Recent Advances in Mutual Fund and Hedge Fund Research'', the Monash Winter Finance Conference 2024, The FIRN 2024 Annual Conference, 2024 Northeastern Finance Conference, 2023 FIRN Asset Management Meeting, 2023 Deakin Finance Department Research Day, the 10th Annual Melbourne Asset Pricing Meeting, and seminars at the University of St. Gallen, the University of Guelph, the University of Toronto, Temple University, RMIT University, and Laval University.
Abstract. Using a novel, hand-collected, data set of currency forward contracts, we study currency management at US international equity mutual funds. Despite prior evidence indicating funds can enhance their investment performance when using currency forwards, most funds are non-users, which we attribute to higher liquidity risk facing those funds. Among user funds, most construct separate long-short “shadow” currency portfolios that generate small average returns, resulting in almost identical investment performance between user and non-user funds. However, further gains from alternative approaches are limited by costly margin requirements which would significantly increase tracking error and result in underperformance relative to the benchmark.
Publications
Cross-Border M&A Flows, Economic Growth, and Foreign Exchange Rates
with Jodie Zhang (QUT).
Review of Financial Studies forthcoming
Presentations: 2023 Santiago Finance Workshop, 2023 WFA Annual Meeting, BIS-Banca d'Italia-ECB 12th Workshop on Exchange Rates, 2022 SFS Cavalcade Asia-Pacific, 11th FIRN Annual Conference, 2022 FMA Asia/Pacific Conference, 2022 Vienna Symposium on Foreign Exchange Markets, 2022 LBS Summer Finance Symposium, 12th Financial Markets and Corporate Governance Conference, 2022 ASU Sonoran Winter Finance Conference, 19th Paris December Finance Meeting, 2021 China International Conference in Finance, 2021 MFA Annual Meeting, and seminar at the Bank of Canada, Deakin University, HEC Montreal, University of Queensland and Queensland University of Technology.
Abstract. We extract information about future economic conditions from firms' cross-border merger and acquisition announcements, and show it predicts changes in relative economic growth rates and foreign exchange rate returns. We find the predictability is driven by the acquisition decisions of domestic firms, which signal turning points in local economic growth. The findings are motivated via a simple model of exchange rate determination with heterogeneous expectations and support the theorized relationship between foreign exchange rates and macroeconomic fundamentals. The results provide new tools for policymakers seeking to predict economic activity and offer global investors a novel source of portfolio diversification.
Non-Standard Errors
Menkveld et al. (2023). First crowd-sourced empirical paper in Economics/Finance (300+ co-authors)
Menkveld et al., 2024, "Nonstandard Errors,” Journal of Finance 79, pp. 2339-2390.
Abstract. In statistics, samples are drawn from a population in a data-generating process (DGP). Standard errors measure the uncertainty in estimates of population parameters. In science, evidence is generated to test hypotheses in an evidence-generating process (EGP). We claim that EGP variation across researchers adds uncertainty: Non-standard errors (NSEs). We study NSEs by letting 164 teams test the same hypotheses on the same data. NSEs turn out to be sizable, but smaller for better reproducible or higher rated research. Adding peer-review stages reduces NSEs. We further find that this type of uncertainty is underestimated by participants.
Foreign Exchange Volume
Cespa, Giovanni, Antonio Gargano, Steven J. Riddiough, and Lucio Sarno, 2022, "Foreign Exchange Volume," Review of Financial Studies 35, pp. 2386-2427.
Media coverage: Quant News (1 and 2), published March 16 2018 and August 24 2018
Media coverage: VoxEU.org, published 17 June 2021
Abstract. We investigate the information contained in foreign exchange (FX) volume using a novel dataset from the over-the-counter market. We find that volume helps predict next day currency returns and is economically valuable for currency investors. Predictability implies a stronger currency return reversal for currency pairs with abnormally low volume today, and is driven by the component of FX volume unrelated to volatility, illiquidity, and order flow. We rationalize these findings via a simple model of exchange rate determination, in which volume helps reveal the degree of asymmetric information in currency markets. Testing this prediction shows that asymmetric information is uniform across currency pairs but varies across instruments.
Business Cycles and Currency Returns
Colacito, Riccardo, Steven J. Riddiough, and Lucio Sarno, 2020, "Business Cycles and Currency Returns," Journal of Financial Economics 137, pp. 659—678.
2017 "WINNER" Best Paper Award Second Prize (Vienna Symposium in FX Markets)
2017 CFA Best Paper Prize, FIRN Annual Conference
Media coverage: CFA Institute, published 30 July 2018
Media coverage: VoxEU.org, published 10 October 2019
Abstract. We find a strong link between currency returns and the relative strength of the business cycle. Buying currencies of strong economies and selling currencies of weak economies generates high returns both in the cross section and time series of countries. These returns stem primarily from spot exchange rate predictability, are uncorrelated with common currency strategies, and cannot be understood using traditional risk factors. We also show that a business cycle factor implied by our results is priced in a broad currency cross section. Finally, we propose a mechanism that generates these facts using an international macro-finance model with long-run risk.
Global Currency Hedging with Common Risk Factors
Opie, Wei, and Steven J. Riddiough, 2020, "Global Currency Hedging with Common Risk Factors," Journal of Financial Economics 136, pp. 780—805.
Abstract. We develop a novel method to dynamically hedge foreign exchange exposure in international equity and bond portfolios. The method exploits the time-series predictability of currency returns, which we show emerges from exploiting a forecastable component in global factor returns. The hedging strategy outperforms leading alternative approaches to currency hedging across a large set of out-of-sample performance metrics. Moreover, we find that exploiting currency return predictability via an independent currency portfolio delivers a high risk-adjusted return and provides superior diversification gains to global equity and bond investors relative to currency carry, value, and momentum investment strategies.
Currency Premia and Global Imbalances
Della Corte, Pasquale, Steven J. Riddiough and Lucio Sarno (2016). "Currency Premia and Global Imbalances," Review of Financial Studies 29(8), 2161-2193.
Winner of the Kepos Capital Award for the Best Paper on Investments at the WFA 2013
Winner of an Inquire Europe Research Grant (EUR 10,000)
Media coverage: VoxEU.org, published 29 February 2016
Abstract. We show that a global imbalance risk factor that captures the spread in countries’ external imbalances and their propensity to issue external liabilities in foreign currency explains the cross-sectional variation in currency excess returns. The economic intuition is simple: net debtor countries offer a currency risk premium to compensate investors willing to finance negative external imbalances because their currencies depreciate in bad times. This mechanism is consistent with exchange rate theory based on capital flows in imperfect financial markets. We also find that the global imbalance factor is priced in cross sections of other major asset markets.
The Two Faces of Cross-Border Banking Flows
Reinhardt, Dennis, and Steven J. Riddiough (2015). "The Two Faces of Cross-Border Banking Flows," IMF Economic Review 63(4), 751-791.
Bank of England Working Paper No. 498
Media coverage: VoxEU.org, published 7 May 2014
Abstract. We examine the determinants of cross-border interbank and intra-group funding across crisis and non-crisis periods. Using a previously unexplored data set spanning 25 banking systems, we find aggregate intra-group funding is unrelated to fluctuations in either global or local macroeconomic fluctuations, while flightier interbank funding responds pro-cyclically to both worldwide and domestic economic trends. This feature of the data means intra-group funding remains comparatively stable when global conditions deteriorate -- even during the global financial crisis. During `normal' times we find intra-group funding responds counter-cyclically to global interest rate changes, with parent banks using affiliates to o set tighter global funding conditions. More generally, we find intra-group funding has a closer relationship with domestic banking system profitability and solvency, being used to support banks in weaker banking systems during the global financial crisis.
Work in Progress
Immigrants, Neighborhoods, and Financial Behaviour
with Martin Ljunge (IFN) and Alexander Ljungqvist (SSE)
Customer-Dealer Relationships in the Foreign Exchange Market
with Pasquale Della Corte (Imperial)