Currency return predictability: utilising forward curve information

Abstract

This thesis examines the characteristics and risk profile of basis momentum (BM) across various asset classes and explores the foreign exchange (FX) curve in FX markets. We find that BM strategies yield significant excess returns and high Sharpe ratios across different formation periods: BM-3 performs best in FX markets, a 12-month period is optimal for commodities and bonds, and a 6-month shows the highest yield in equity indexes. Decomposing the BM signal reveals its components' relationships with market anomalies and their distinct contributions. Carry and momentum factors drive BM returns in currency and commodity markets, while the second-nearest forward contract primarily explains the BM returns most in bonds and equities. Adding BM to panel regression models slightly improves regression fit. We also analyse currency slope and curvature strategies, finding they generate significantly positive excess returns across 1, 3, 6, 9, and 12-month periods. Carry explains a large number of slope and curvature returns, with minimal contributions from other currency factors. These findings enhance the understanding of BM and FX curve portfolios within asset pricing.

Date of Award	Dec 2024
Original language	English
Awarding Institution	Queen's University Belfast
Sponsors	Chinese Scholarship Council (CSC)
Supervisor	Jiadong Liu (Supervisor), Minyou Fan (Supervisor) & Fearghal Kearney (Supervisor)