Factor Investing in Currency Markets: Does It Make Sense?

The concept of factor investing emerged at the end of the 2000s and has completely changed the landscape of equity investing. This approach has been extended to multiasset portfolios and, more recently, has gained popularity in the fixed-income universe. In this article, the authors focus on currency markets. The dynamics of foreign exchange rates are generally explained by several theoretical economic models that are commonly presented as competing approaches. In the opinion of the authors, they are more complementary and can be the backbone of a Fama-French-Carhart risk factor model for currencies. In particular, the authors show that these risk factors may explain a significant part of time-series and cross-section returns in foreign exchange markets.