A Low-Risk Strategy based on Higher Moments in Currency Markets

Title: A Low-Risk Strategy based on Higher Moments in Currency Markets

Author: Claudia Zunft, Goethe University

Abstract: I identify a new strategy in currency forward markets that exploits the predictive power of functions of higher moments of currency returns. The strategy is long in currencies whose higher return moments are low relative to past levels and short in currencies whose higher return moments are high relative to past levels. The low-risk strategy based on higher moments is not spanned by traditional currency strategies. In a sample of roughly 25 years, it provides the highest mean excess payoff and Sharpe ratio as well as the smallest drawdown in comparison to them. The profitability of the strategy is not explained by standard risk factors and limits-to-arbitrage.