Puzzling Premiums on FX Markets: Carry Trade, Momentum, and Value Alone and Strategy Diversification

Abstract

We construct and compare the results of exploiting individual investment strategies: carry trade, momentum, and value and estimate the benefits from strategy diversification. Our analysis is based on the set of 10 major currencies and the expanded sample additionally including 16 emerging market currencies. We implement strategies in FX markets against the ruble instead of the US dollar, as is common in the currency literature. We find that the performance of strategies varies with the change of the ruble regime. We also provide proof that combining strategies, based on volatility, offers significant improvement in risk-adjusted returns compared to either of the two strategies independently or to benchmarks.