Research

Time-Varying Global Dollar Risk in Currency Markets
(Job Market Paper)

Abstract

This paper documents that the price of dollar risk exhibits significant time variation, switching sign after large realized dollar fluctuations, when global dollar demand is high and funding constraints are tight. To exploit this feature of dollar risk, I propose a novel currency investment strategy which is effectively long the dollar in normal states, but shorts the dollar after large dollar movements. The proposed strategy is not exposed to standard risk factors, yields an annualized return exceeding 4%, and has an annualized Sharpe ratio of 0.34, significantly higher than that of well-known currency strategies. Furthermore, I show that currencies other than the dollar do not exhibit the same sign-switching pattern in their price of risk, consistent with the view that the dollar is special.

Conferences/Seminars: Young Scholars Nordic Finance Workshop, Stockholm (scheduled); Warwick Business School, Coventry

Foreign Exchange Fixings and Returns Around the Clock
joint work with Philippe Mueller and Paul Whelan

Abstract

We document a new stylised fact in foreign exchange markets: Intraday currency returns display a systematic `W' shaped return pattern over the course of the trading day, resulting from a depreciation of the U.S dollar in the hours that precede major fixings (Tokyo, Frankfurt, London) and appreciation thereafter. This pattern is a systemic feature of the data being present in each day of the week, month of the year, each of the 20-years in our sample, and is unrelated to special days such as macro or central bank announcements.

Conferences/Seminars: American Finance Association Annual Meeting, San Diego (scheduled); FRIC Brown Bag, Copenhagen* (scheduled); New York Fed*, Research Seminar; Alliance Manchester Business School*, Manchester; Northern Finance Association Annual Meeting 2019, Vancouver; 15th Annual Conference of the Asia-Pacific Association of Derivatives, Busan; Goethe University Finance Seminar*, Frankfurt; 6th CAMF Asset Pricing Workshop, York; Baltic Economic Conference*, Riga; Royal Economic Society, Warwick; MNFS Spring Conference 2019, Chania; ITAM Finance Seminar*, Mexico City; PBC Seminar*, Tsinghua Universtiy; Durham Business School Seminar*, Durham; BI Business School Seminar*, Oslo; AFA Ph.D. Poster Session, Atlanta; New Zealand Finance Meeting*, Queenstown; 31st Australasian Finance and Banking Conference*, Sydney; 13th Annual Hedge Fund Conference*, London; HKUST Finance Symposium; Warwick Business School, Brown Bag; 9th Annual Financial Market Market Liquidity Conference, Budapest; FRIC Research Seminar*, Copenhagen; New Economics School Moscow, Brown Bag*; 7th International Moscow Finance Conference*, ICEF Moscow; HEC Montreal Brown Bag*; Northern Finance Association Conference 2018, Quebec; FMA 2018, San Diego; Barclays Research Seminar*, London; Fulcrum Asset Management Research Seminar*, London; ICEF Moscow*, Moscow; INQUIRE-Sussex Business School Seminar*, London; Commodity and Energy Markets Annual Meeting 2018, Rome; 12th Inquire Business School Seminar*, London

FX Spot and Swap Market Liquidity Spillovers
joint work with Vladyslav Sushko
(Available on SSRN: Link)

Abstract

This paper assesses liquidity conditions in foreign exchange (FX) spot and derivatives markets using intra-day data against the background of FX dealers' response to recent regulatory changes. Given that FX swap markets are by some measures even deeper that the spot market, an assessment of FX liquidity requires taking such instruments into account. We find that spot and swap market liquidity is intimately linked. Furthermore, the co-movement between FX funding and market liquidity, as gleaned from the pricing of both types of instruments, has increased over time. This development relates to dealer balance sheet capacity. While top dealers continue to dominate liquidity provision in spot, they tend to pull back from market making in FX swaps around regulatory reporting periods. This shifts market-making activity in FX derivatives towards smaller, more expensive and less informed, dealers, and also results in adverse spillovers to liquidity conditions in spot markets.

Conferences/Seminars: Brown Bag Norges Bank, Oslo; Bank of England Research Seminar, London*; 7th Workshop on Financial Determinants of Foreign Exchange Rates, Norges Bank; International Conference on Market Design and Regulation in the Presence of High-Frequency Trading, City University Hong Kong, City University of Hong Kong; Research Seminar*, Hong Kong Monetary Authority; Research Meeting, Bank for International Settlements.

Performance, Persistence, and Pay: A New Perspective on CTAs
joint work with Alexander Mende, Michael Moore, and Vikas Raman
(Available on SSRN: Link)

Abstract

Using a large and representative dataset of commodity trading advisors (CTAs), we provide compelling evidence that CTAs generate significant net excess returns of at least 4.1% annually; that approximately 64% of the funds have positively skewed returns; and that there is considerable heterogeneity amongst CTAs, with systematic trend followers doing significantly better than other subcategories. More importantly, we find that CTAs not only beat passive, normative benchmarks, with a yearly gross alpha of at least 5.3% but also generate significant, incremental crisis alpha during periods of equity market turmoil. Finally, we show that cross-sectional differences in the performance of CTAs are persistent up to 3 years and that managerial compensation predicts fund performance. Our results are consistent with a rational market where investors compete to invest with successful CTA managers, who use fees to signal their skills to investors.

Conferences/Seminars: FMA Europe 2019, Glasgow; FMA 2018, San Diego; AFA Ph.D. Poster Session 2018, Philadelphia; Summer School on Institutional Investors, Ghent University; Brown Bag, Warwick Business School.

Dealer information and macro fundamentals - New evidence from hybrid exchange rate models
joint work with Michael Moore (Journal of International Money and Finance (forthcoming). Special issue: Exchange rate models for a new era: Major and emerging market currencies.)

Abstract

We construct a new class of hybrid exchange rate models, combining macroeconomic fundamentals from a conventional Taylor rule with information from the foreign exchange interdealer market. We provide evidence that hybrid models have a superior model .t and produce more accurate in-sample predictions than their individual nested components. As part of our analysis, we employ a new market microstructure measure, based on submitted and cancelled limit orders, and document its significant impact on monthly exchange rate returns. We show that its effect is transitory and largely diminishes in a stylised out-of-sample forecasting exercise, while market order flow can improve short-term forecasts. Our comprehensive empirical assessment is based on one of the largest foreign exchange interdealer datasets analysed so far. It comprises nineteen U.S. dollar and euro currency pairs and covers a sample period of more than ten years.

Conferences/Seminars: Exchange Rates Models for an New Era: Major and Emerging Market Currencies, City University of Hong Kong; 6th Workshop on Financial Determinants of Foreign Exchange Rates, Bank of England; Brown Bag, Warwick Business School.

* Presented by co-author.