We study the economic value of market timing in foreign exchange (FX) markets, that is, using information about the conditional Sharpe ratio to adjust the notional value of a conditionally mean–variance efficient currency portfolio. Our strategy trades more (less) aggressively when the conditional risk-return trade-off is more (less) favorable. This leads to a significant improvement in the out-of-sample unconditional Sharpe ratio, skewness, and maximum drawdown per 1% expected excess return. The strategy’s market timing predicts returns, volatility, and skewness in FX markets. Popular currency pricing factors do not explain the strategy’s high average excess returns. Our findings suggest that it is costly to impose leverage or risk (i.e., conditional volatility) limits or other inferior market timing policies when constructing currency trading strategies.
3917 7496
KK 837
PhD in Finance, London School of Economics, 2012
MSc in Finance and Economics, London School of Economics, 2008
BA in Economics, University of St Gallen, 2006
Thomas Andreas Maurer is an Associate Professor of Finance at the HKU Business School, The University of Hong Kong. Before joining HKU in 2019, he was an Assistant Professor of Finance at the Olin Business School, Washington University in St. Louis from 2012 to 2019. Thomas earned his London School of Economics MSc in Finance and Economics degree in 2008 and his LSE PhD in Finance degree in 2012. During his PhD studies he has spent one year as a visiting scholar at the University of Chicago Booth School of Business.
His research contributions are in the area of theoretical and empirical asset pricing, international finance and household finance. He regularly serves as a committee member for academic conferences and as an academic referee for many major economics and finance journals.
At HKU, Thomas is teaching classes on derivative securities to undergraduate students. In 2017, the graduating Master of Finance class at Wash U has chosen him as the best teacher and he was awarded the Reid teaching prize for the professor “whose enthusiasm and exceptional teaching most inspire, energize, and transform students”.
FINA2322 Derivatives
Asset pricing
International Finance
Household Finance
- “Market Timing and Predictability in FX Markets,” (with Thuy-Duong Tô and Ngoc-Khanh Tran), Review of Finance,2023, 27(1), 223-246.
- “Pricing Implications of Covariances and Spreads in Currency Markets,” (with Thuy-Duong Tô and Ngoc-Khanh Tran), The Review of Asset Pricing Studies, 2022, 12(1), 336-388.
- “Entangled Risks in Incomplete FX Markets,” (with Ngoc-Khanh Tran), Journal of Financial Economics, 2021, 142(1), 146-165.
- “Pricing Risks Across Currency Denominations,” (with Thuy-Duong Tô and Ngoc-Khanh Tran), Management Science, 2019, 65(11), 5308-5336.
We introduce the concept of risk entanglement in a preference-free setting to jointly explain the exchange rate volatility, cyclicality, and currency risk premia in the data. Risk entanglement specifies a subset of incomplete market models, in which nondiffusive or nonlog-normal shocks to exchange rates are not fully spanned by asset returns. When risks are entangled, there exist multiple pricing-consistent exchange rates, but none of them are equal to the ratio of the stochastic discount factors (SDFs) or their projections. Decoupling the exchange rate from the SDFs allows us to address key FX market patterns that are puzzling in international finance.
From a private banking practitioner to a scholar, Dr. Maurer is a romantic man driven by interests instead of gold. Keen on knowledge sharing, Dr. Maurer hopes that he could induce positive impacts on students.