In this seminar Peter Smith will provide an overview of his recent paper Carry, Momentum and Trend Following Returns in the Foreign Exchange Market. The author shows that significant excess returns can be achieved by following a trend-following strategy which buys long positions in currencies that have achieved positive recent returns and otherwise holds cash. Trend following has received relatively little attention, despite being widely used in futures markets, particularly commodities, for many decades. Peter Smith shows that, whilst a carry trade factor can be regarded as a significantly priced risk factor in the forward foreign exchange market for 39 countries, a trend following factor is also significantly priced. In a two-factor model the carry trade factor is dominated by the trend following factor in terms of economic and statistical significance. The performance of the trend following factor is more surprising given that it does not have the negative skewness or maximum drawdown characteristic which is shown by the carry trade factor. This also makes the trend following strategy of more potential attraction to investment specialists.

Peter N Smith is Professor of Economics and Finance at the University of York. His research is in areas of financial economics, macroeconomics and labour economics. In recent times he has published research papers on the analysis of the importance of macroeconomic sources of risk in domestic and international asset markets, the significance of trend following as an investment strategy and risk factor in a range of asset markets and on the determination of the gender pay gap.

The CAMA Macroeconomics Brown Bag Seminars offer CAMA speakers, in particular PhD students, an opportunity to present their work in progress in front of their peers, and reputable visitors to showcase their work.