The investment universe consists of currency pairs trading against the U.S. dollar ($USD).
ASSET CLASS: CFDs, forwards, futures | REGION: Global | FREQUENCY:
Monthly | MARKET: currencies | KEYWORD: Financial, Integration
I. STRATEGY IN A NUTSHELL
The strategy ranks currencies against the U.S. dollar based on their attention to financial integration (AFI) in news articles. Portfolios are formed monthly into quintiles, and a long-short HML portfolio goes long low-AFI currencies and short high-AFI currencies.
II. ECONOMIC RATIONALE
Currencies with higher exposure to financial integration news demand a risk premium, offering higher expected returns. The AFI-based approach consistently generates robust and significant alphas, outperforming traditional risk-factor strategies.
III. SOURCE PAPER
Investor Attention to News on Financial Integration and Currency Returns [Click to Open PDF]
Ilias Filippou, Washington University in St. Louis – John M. Olin Business School; My T. Nguyen, Centre for Economic Policy Research (CEPR); Mark P. Taylor, Brookings Institution
<Abstract>
In this paper, we examine the economic value of a text-based measure of financial integration. Our attention measure of financial integration is a strong positive predictor of currency excess returns. Specifically, the financial integration measure is positively priced in the cross-section of currency excess returns. Thus, investors require a risk premium for holding currencies with high exposure to financial integration news. Our results are robust to alternative test assets, and the financial integration portfolios offer significant alphas when controlling for other currency investment strategies.
IV. BACKTEST PERFORMANCE
| Annualised Return | 5.28% |
| Volatility | 11% |
| Beta | N/A |
| Sharpe Ratio | 0.48 |
| Sortino Ratio | N/A |
| Maximum Drawdown | N/A |
| Win Rate | N/A |
