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Global Political Risk and Currency Momentum

  • Ilias Filippou, Arie E. Gozluklu and Mark P. Taylor


Using a measure of political risk, relative to the United States, that captures unexpected political conditions, we show that political risk is priced in the cross section of currency momentum and contains information beyond other risk factors. Our results are robust after controlling for transaction costs, reversals, and alternative limits to arbitrage. The global political environment affects the profitability of the momentum strategy in the foreign exchange market; investors following such strategies are compensated for the exposure to the global political risk of those currencies they hold, that is, the past winners, and exploit the lower returns of loser portfolios. The risk compensation is mainly justified by the different exposures of foreign currencies in the momentum portfolio to U.S. political shocks, which is the main component of global political risk.


Corresponding author

*Filippou,, Gozluklu,, University of Warwick Business School; Taylor (corresponding author),, Washington University in St. Louis Olin School of Business.


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We thank Paul Malatesta (the editor) and Yuhang Xing (the referee) for helpful and constructive comments on a previous version of this paper. We are also grateful to Philippe Dupuy (discussant), Gikas Hardouvelis, Mohammad Jahan-Parvar, Eylem Ersal Kiziler, Dong Lou, Michael Moore, Aline Muller (discussant), Vikram Nanda, Alessandro Palandri, Evgenia Passari, Paolo Porchia (discussant), George Skiadopoulos, Alex Stremme, Christian Wagner and Chishen Wei (discussant) as well as seminar participants at the 2015 Georgetown Center of Economic Research (GCER), the 2015 China International Conference in Finance, the 2015 Finance Forum, the 2015 FMA European conference, the 2015 International Conference of the French Finance Association, Manchester Business School and the University of Piraeus for very useful comments. Filippou thanks the Economic and Social Research Council (ESRC) as well as the University of Warwick Business School for the financial support.



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