Trade 40 currencies based on M&A activity, going long on the highest tercile and short on the lowest, with equally weighted, monthly rebalanced portfolios using standardized net inflow measures.
ASSET CLASS: CDS, futures | REGION: Global | FREQUENCY:
Monthly | MARKET: currencies | KEYWORD: M&A
I. STRATEGY IN A NUTSHELL
Go long on currencies of countries with high net M&A inflows to the U.S. and short those with low inflows. Portfolios are equally weighted and rebalanced monthly using M&A activity as a predictive signal.
II. ECONOMIC RATIONALE
Cross-border M&A activity reflects expected economic growth. Countries attracting more acquisitions signal stronger fundamentals, often leading to currency appreciation, making M&A a predictive indicator for FX returns.
III. SOURCE PAPER
Cross-Border M&A and Currency Returns[Click to Open PDF
Steven J. Riddiough and Huizhong Zhang
<Abstract>
We uncover a novel source of currency return predictability stemming from cross-border merger and acquisition (M&A) activity: abnormally large M&A inflows lead exchange rate appreciations, while depreciations follow unusually large M&A outflows. We show that a simple cross-sectional currency strategy exploiting this predictability generates a Sharpe ratio of over 0.70 and is orthogonal to existing currency strategies. The portfolio weights are found to coincide with local extremes in macroeconomic fundamentals: countries experiencing the largest abnormal M&A outflows are growing most above their economic growth trend – a pattern that reverses following portfolio formation – while the opposite reversal in macroeconomic fundamentals is observed in countries experiencing unusually large M&A inflows
IV. BACKTEST PERFORMANCE
| Annualised Return | 4.59% |
| Volatility | 5.43% |
| Beta | N/A |
| Sharpe Ratio | 0.85 |
| Sortino Ratio | N/A |
| Maximum Drawdown | -6.62% |
| Win Rate | N/A |
