Currency Anomalies

This paper is the first to study the cross-section of currency excess return predictors. Using real-time data, quantitative currency trading strategies are profitable even after transaction costs and comprehensive risk adjustments. However, risk-adjusted profits decrease after the publication of the underlying academic research. In line with predictor profits reflecting mispricing, the decline is greater for strategies with larger in-sample profits and lower arbitrage costs. Moreover, the effect of risk adjustments on trading profits is limited, and signal ranks and alphas decay quickly. While analysts’ currency forecasts are inconsistent with currency predictors, analysts update their forecasts quickly to incorporate lagged predictor information. The results suggest that market participants learn about mispricing from academic publications, while contributing to it when following analysts’ forecasts.