Downside risk properties of foreign exchange and equity investment strategies

Jacob Gyntelberg and Andreas Schrimpf

Abstract

ABSTRACT

This paper presents an overview of widely practiced short-term multicurrency investment strategies such as carry-trade, momentum and term-spread strategies. We provide novel evidence on their downside risk properties and illustrate their performance over historical episodes of financial distress.We show that the strategies exhibit substantial tail risks and that they do not perform uniformly during periods of turmoil in global markets. Interestingly, common equity benchmarks feature even greater downside risks than foreign exchange investment strategies.