Research

Working papers

A 'Bad Beta, Good Beta' Anatomy of Currency Risk Premiums and Trading Strategies, with I-Hsuan Ethan Chiang

• 2019 China Finance Review International Conference Best Paper Award

• 2019 FMA Best Paper in Financial Institutions & Markets, Semifinalist

We test a two-beta currency pricing model that features betas with risk-premium news and real-rate news of the currency market. Unconditionally, beta with currency market risk-premium news is bad because of a significantly positive price of risk of 2.52% per year; beta with global real-rate news is good because of the negative price of risk. The price of risk-premium-beta risk is countercyclical, whereas the price of the real-rate-beta risk is procyclical. Most prevailing currency trading strategies have either excessive bad beta or too little good beta, thus fail to deliver abnormal performance. Our empirical results can be delivered by a no-arbitrage model with precautionary savings and a pricing kernel characterized by two separate global shocks.

Trend Factor around the World: Do Cultural Differences Explain the Performance Differences? with Yufeng Han and Jian Yang

In this paper, we test whether the trend factor would work across different countries and markets. We find consistent evidence that the trend factor which captures information in moving average prices of various time lengths, could generate positive Sharpe ratio across most of the developed countries. It outperforms the market portfolio, short-term reversal, momentum, and long-term reversal in most of the developed countries. We further examine how cultural differences and legal attributes influence the returns of the trend factor. The empirical results show that the trend factor is more profitable in countries where the individualism is higher. The performance of the global trend factor is robust to different sub periods and subsamples. From an asset pricing perspective, it also performs well in explaining cross-section stock returns.

Work-in Progress

The Future's So Blurry, I Gotta Wear Shades, with I-Hsuan Ethan Chiang