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Rethinking currency factors: The case for mean-variance optimisation

Author

Listed:
  • Fan, Minyou
  • Kearney, Fearghal
  • Li, Youwei
  • Liu, Jiadong

Abstract

We show that a Bayesian 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, instead of the time series predictability. International diversification plays an important role in the outperformance of the MV optimisation approach. Our asset pricing tests suggest that the MV-optimised factors subsume the abnormal return of the naïve currency factors.

Suggested Citation

  • Fan, Minyou & Kearney, Fearghal & Li, Youwei & Liu, Jiadong, 2026. "Rethinking currency factors: The case for mean-variance optimisation," Journal of International Money and Finance, Elsevier, vol. 167(C).
    • Handle: RePEc:eee:jimfin:v:167:y:2026:i:c:s026156062600121x
    DOI: 10.1016/j.jimonfin.2026.103636
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    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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