Research

Value and Momentum Leftovers [Paper] [Data]

with Lucio Sarno, Bo Yuan and Gabriele Zinna

Abstract: Historically, investing in value and momentum strategies has delivered high excess returns across geographical locations and asset classes. However, no pricing kernel has yet been proposed that fully explains these excess returns, meaning that some alpha remains unexplained - the "leftovers". We find that a pricing kernel comprising nine latent factors extracted from the combined value and momentum cross-section, rather than from the two separate cross-sections, yields no leftovers and achieves a higher Sharpe ratio. Accounting for these leftovers is also key to obtain robust estimates of the risk premia of macro-financial risks priced in the value and momentum cross-section.

Presentations: 14th Workshop on Exchange Rates, Bank of Belgium; Research Seminars in Finance, Economics and Banking, FMA-FEB-RN; 5th Annual Bristol Financial Markets Conference on Financial Markets and the Macroeconomy, University of Bristol; 2025 Economics Letters Summer School on New Frontiers in Macro-Finance, Bocconi University; 10th Annual Conference of the Society for Economic Measurement, Athens University of Economics and Business; CERF Research Lunch Seminar, University of Cambridge; 5th Frontiers of Factor Investing, Lancaster University

Large Moves in the Foreign Exchange Market [Paper]

with Alexandros Kostakis, Lucio Sarno and Junxuan Wang

Abstract: The timing of large currency moves - say three-standard deviations events - is often considered random. In contrast, we show that a non-trivial proportion of large moves in exchange rates is predictable in real time via the slope of the term structure of option-implied volatility (IV). Specifically, the difference between short-term and longer-term IVs is a significant and robust predictor of large currency returns in absolute value. This predictive relationship is exploitable in a trading strategy that buys strangles when the term structure of IV is sufficiently inverted, to profit from the subsequent realization of such large moves.

Presentations: 2nd Liverpool Workshop in Options Markets, University of Liverpool; New Challenges & Risks in Finance, Oxford-Man Institute; CERF Inspiration Talk, University of Cambridge; Seminar, Queen's University Belfast; JM Keynes Fellowship Fund Lecture, University of Cambridge

Mentions: CME FX Insights

ECBetas in Equity Strategy Returns [Paper] [New Paper!]

with Lucio Sarno and Gabriele Zinna

Abstract: Using high-frequency overnight index swap (OIS) surprises around ECB Governing Council meetings, we uncover a sharp monetary policy risk–return tradeoff in a cross-section of 153 long–short equity factors. Equity strategies more exposed to ECB monetary policy shocks - those with lower OIS betas - earn higher excess returns and Sharpe ratios. Results strengthen using asset pricing methods that account for measurement errors and omitted variables. This risk premium arises primarily in the press release window - i.e. the monetary policy decision - and displays a tent-shaped pattern that peaks with OIS surprises between six-month and two-year tenors.