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FX strategies in periods of distress

Author

Listed:
  • Jacob Gyntelberg
  • Andreas Schrimpf

Abstract

This article presents an overview of widely practised short-term multicurrency investment strategies such as carry trade, momentum and term spread strategies. We provide evidence on their downside risk properties and illustrate their performance over historical episodes of financial market turmoil. We show that the strategies exhibit substantial tail risks and that they do not perform uniformly during distress periods in global markets. Interestingly, equity market investments feature even greater downside risk.

Suggested Citation

  • Jacob Gyntelberg & Andreas Schrimpf, 2011. "FX strategies in periods of distress," BIS Quarterly Review, Bank for International Settlements, December.
    • Handle: RePEc:bis:bisqtr:1112e
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    References listed on IDEAS

    as
    1. Menkhoff, Lukas & Sarno, Lucio & Schmeling, Maik & Schrimpf, Andreas, 2012. "Currency momentum strategies," Journal of Financial Economics, Elsevier, vol. 106(3), pages 660-684.
    2. Christopher J. Neely & Paul A. Weller, 2011. "Technical analysis in the foreign exchange market," Working Papers 2011-001, Federal Reserve Bank of St. Louis.
    3. Hanno Lustig & Nikolai Roussanov & Adrien Verdelhan, 2011. "Common Risk Factors in Currency Markets," The Review of Financial Studies, Society for Financial Studies, vol. 24(11), pages 3731-3777.
    4. Christiansen, Charlotte & Ranaldo, Angelo & Söderlind, Paul, 2011. "The Time-Varying Systematic Risk of Carry Trade Strategies," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 46(4), pages 1107-1125, August.
    5. Hanno Lustig & Adrien Verdelhan, 2007. "The Cross Section of Foreign Currency Risk Premia and Consumption Growth Risk," American Economic Review, American Economic Association, vol. 97(1), pages 89-117, March.
    6. Pojarliev, Momtchil & Levich, Richard M., 2010. "Trades of the living dead: Style differences, style persistence and performance of currency fund managers," Journal of International Money and Finance, Elsevier, vol. 29(8), pages 1752-1775, December.
    7. Lukas Menkhoff & Mark P. Taylor, 2007. "The Obstinate Passion of Foreign Exchange Professionals: Technical Analysis," Journal of Economic Literature, American Economic Association, vol. 45(4), pages 936-972, December.
    8. Lucio Sarno, 2005. "Viewpoint: Towards a solution to the puzzles in exchange rate economics: where do we stand?," Canadian Journal of Economics, Canadian Economics Association, vol. 38(3), pages 673-708, August.
    9. Robert N McCauley & Patrick McGuire, 2009. "Dollar appreciation in 2008: safe haven, carry trades, dollar shortage and overhedging," BIS Quarterly Review, Bank for International Settlements, December.
    10. Jacob Gyntelberg & Eli M Remolona, 2007. "Risk in carry trades: a look at target currencies in Asia and the Pacific," BIS Quarterly Review, Bank for International Settlements, December.
    11. Markus K. Brunnermeier & Stefan Nagel & Lasse H. Pedersen, 2009. "Carry Trades and Currency Crashes," NBER Chapters, in: NBER Macroeconomics Annual 2008, Volume 23, pages 313-347, National Bureau of Economic Research, Inc.
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    Citations

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    Cited by:

    1. Accominotti, Olivier & Chambers, David, 2016. "If You're So Smart: John Maynard Keynes and Currency Speculation in the Interwar Years," The Journal of Economic History, Cambridge University Press, vol. 76(2), pages 342-386, June.
    2. Hossfeld, Oliver & MacDonald, Ronald, 2015. "Carry funding and safe haven currencies: A threshold regression approach," Journal of International Money and Finance, Elsevier, vol. 59(C), pages 185-202.
    3. Accominotti, Olivier & Chambers, David, 2014. "Out-of-sample evidence on the returns to currency trading," Economic History Working Papers 84582, London School of Economics and Political Science, Department of Economic History.
    4. McCauley, Robert, 2013. "Risk-On/Risk-Off, Capital Flows, Leverage and Safe Assets," Journal of Financial Perspectives, EY Global FS Institute, vol. 1(2), pages 145-154.
    5. Richard M. Levich & Frank Packer, 2017. "Development and Functioning of FX Markets in Asia and the Pacific," Financial Markets, Institutions & Instruments, John Wiley & Sons, vol. 26(1), pages 3-58, February.
    6. Sotiropoulos, Dimitris P., 2012. "Revisiting the 1992-93 EMS crisis in the context of international political economy," Economics Discussion Papers 2012-7, School of Economics, Kingston University London.

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    More about this item

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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