We mentioned multiple times that we at Quantpedia love historical analysis that spans over a long period of time as it offers a unique glimpse into the different macro environments and periods of political and economic instabilities. These long-term studies help a lot in risk management, and they also help investors set the right expectations about the range of outcomes in the future. Historical analysis of equity and fixed-income markets is not rare, but currency markets are less explored. Therefore, we are happy to investigate a recent paper by Joseph Chen that analyzes carry, momentum, and value strategies in the currency markets over the 200-year history.

Forex markets lure retail traders into a game of “hunting pips” with high leverage and high turnover scalping strategies, in which small traders often lose more than they can afford. But there are other ways of trading currencies. The smart money knows how to exploit interest rate spreads that this asset class offers by employing the FX Carry Trade strategy. In the past decade, the low interest rates of the most developed countries made the FX Carry strategy less profitable, but as inflation returned, higher interest rates returned in some countries, too, and with them, the interest rate spreads widened. And FX Carry is back, and the question stands: Can we improve this well-known trading style?

Investing in emerging markets (EM) or developed markets (DM) outside of the United States tends to follow cyclical trends. At times, it becomes popular and crowded to focus solely on U.S. stocks, while in other periods, the trend shifts to favor everything except U.S. equities. This inclination often relies on historical and past performance data, although it doesn’t guarantee identical outcomes in the future. But what drives these periods of popularity? When do U.S. markets outperform Emerging Markets or other Developed Markets? When do large-cap stocks outperform small-cap stocks, and when do growth stocks outperform value stocks? Are those ebbs and flows in the performance of major thematic investments somehow interlinked, and can we uncover some insights into why this occurs? Those are the questions we will try to answer in the following analysis.

Finding high-quality data with a long history can be challenging. We have already examined How To Extend Historical Daily Bond Data To 100 years, How To Extend Daily Commodities Data To 100 years, and How To Build a Multi-Asset Trend-Following Strategy With a 100-year Daily History. Following the theme of our previous articles, we decided to extend historical data of a new factor, the Dollar Factor. This article explains how to combine multiple data sources to create a 100-year daily data history for the Dollar Factor (the value of the United States Dollar relative to its most important trading partners’ currencies), introduces data sources, and explains the methodology.

Delta hedging is a trading strategy that aims to reduce the directional risk of short option strategy and reach a so-called delta-neutral position. It does so by buying or selling small increments of the underlying asset. Similarly, grid trading is a trading strategy that buys/sells an asset depending on its price moves. When the price falls, it buys and sells when the price rises a certain amount above the buying price. This article examines the similarities between delta hedging and grid trading. Additionally, it analyzes numerous versions of grid trading strategies and compares their advantages and disadvantages.