NEOMA Business School
1 Rue du Marechal Juin
Institutional Affiliation: Neoma Business School
Information about this author at RePEc
NBER Working Papers and Publications
|January 2019||Currency Factors|
with Geert Bekaert: w25449
We examine the ability of existing and new factor models to explain the comovements of G10- currency changes, measured using the novel concept of “currency baskets”, representing the overall movement of a particular currency. Using a clustering technique, we find a clear two-block structure in currency comovements with the first block containing mostly the dollar currencies, and the other the European currencies. A factor model incorporating this “clustering” factor and two additional factors, a commodity currency factor and a “world” factor based on trading volumes, fits currency basket correlations much better than extant factors, such as value and carry, do. In particular, it explains on average about 60% of currency variation and generates a root mean squared error relative to sample c...