Rethinking currency factors: The case for mean-variance optimisation
Abstract
We show that a simple mean-variance (MV) optimisation can substantially enhance the performance of established currency factor strategies such as Carry, Value, and Momentum. We find that the improved performance is due to the stronger cross-sectional predictability of the optimised strategies. International diversification plays a key role in optimisation due to 1) the low correlation between developed and emerging currencies, and 2) the low level of comovement across emerging currencies. We also find that the outperformance of our proposed MV optimised factor portfolios is positively related to the standard deviation of currency abnormal returns over time. Our asset pricing tests suggest that the MV optimised factors subsume the corresponding plain currency factors.
Fields of Study & Subjects
Monetary Policy and Economic Impact
Publication details
- Journal / source
- Journal of International Money and Finance
- Publisher
- Elsevier BV
- Volume
- 167
- Pages
- 103636–103636
- Publication date
- 10 July 2026
- Language
- EN