We study the factor structure of currency characteristics by employing a three-dimensional tensor factor model that simultaneously captures the variation in characteristics of the G10 currencies over time. We show that factor-mimicking portfolios derived from these common factors in currency characteristics are able to price individual currency returns better than standard factor models derived from univariate sorts on the same characteristics. The variation in currency characteristics can be well captured by a parsimonious two-factor model, where the first factor closely resembles the carry trade and the second factor acts as a hedge against carry crash risk, that is composed of signals from FX momentum, FX value and the term spread. A potential third factor, which dynamically weights several characteristics, incrementally improves the fit of the total variation but has a high Sharpe ratio.
Presentations: QFFE 2025 (Marseille), IRMC 2025 (Bari, scheduled), IAAE 2025 (Torino, scheduled), VfS 2025 (Cologne, scheduled).
This paper proposes a Generalized Method of Moments (GMM)-based filtering approach to estimate conditional factor pricing models based on a set of central asset pricing moments. Unlike traditional methods that assume constant risk premia or rely on predictive regressions, this approach dynamically adjusts risk prices and exposures through a recursive process aimed at reducing conditional moment violations. Estimation and inference are performed using standard GMM procedures. Monte Carlo results show that the proposed approach effectively filters different types of risk premium dynamics. Applied to the Fama-French 5-factor model, the GMM-based procedure can substantially reduce pricing errors compared to other dynamic and static approaches. The results suggest that premium dynamics vary across factors, and while they are generally countercyclical, they show significant declines at the beginning of crisis periods. Moreover, adding a momentum factor reduces pricing but not prediction errors, indicating that momentum can be partly explained by the dynamics of other factors.
Presentations: Statistical Week 2023 (Dortmund), German Finance Association DGF 2023 (Hohenheim), University of Liechtenstein, University of Graz, CFE 2023 (Berlin), Midwest Finance Association 2024 (Chicago), SNDE Symposium 2024 (Padova), QFFE 2024 (Marseille), SoFiE (Pre-)Conference 2024 (Rio de Janeiro), IAAE 2024 (Thessaloniki), EEA-ESEM 2024 (Rotterdam), VfS 2024 (Berlin), IRMC 2025 (Bari, scheduled), Econometric Society World Congress 2025 (Seoul, scheduled).
Journal of Applied Econometrics, 2025, 40, no. 4: 455–70 . https://doi.org/10.1002/jae.3119.
Economics Letters, 2025, 247: 112119. https://doi.org/10.1016/j.econlet.2024.112119.
Journal of Econometrics, 2023, 237 2C: 105470. https://doi.org/10.1016/j.jeconom.2023.05.007.
Best Doctoral Paper Award DGF 2019
Journal of International Economics, 2021, 133: 103541. https://doi.org/10.1016/j.jinteco.2021.103541.