Handbook of Exchange Rates

16.6 Conclusion

We have discussed that in FX there is no single index which market participants typically cite as a benchmark, unlike for example in equities where the S&P500 is an obvious candidate for market beta. However, in spite of this, we can create relatively generic FX strategies that mimic popular investment styles within the foreign exchange markets, notably carry and trend-following strategies within FX. Hence, these generic strategies can act as proxies for an FX market beta. We also examined FX value, which is often cited as a form of FX beta.

We of course need to note that this exercise for creating a proxy market beta is likely only to be suitable to capture the returns for FX market participants who are speculators, investing in FX as an asset class. Other market participants such as central banks trade within the FX market, but their trading objectives are not usually purely to maximize profit. Instead, they seek other objectives such as diversification of reserves and damping volatility in their local currency. Similarly, investors trading other asset classes trade FX to hedge or partially hedge their transactions. Here, other benchmarks might be suitable to judge their FX returns. For example, if a UK equities investor is buying S&P500, but has an active FX hedging strategy, several benchmarks they might wish to use could be comparing their returns to FX un-hedged and FX-hedged index returns.

We note that carry and trend-following strategies within FX bear little ...