Recent Academic Research

FX return relationship with macro announcements and Treasury auctions, a new trend following strategy, and seasonality in the mortgage markets

Effect of Macro News and Treasury Auctions

Foreign exchange returns spike when macroeconomic announcements follow Treasury auctions, revealing a powerful link between safe asset demand and currency markets.

The paper shows that when macroeconomic announcements are immediately preceded by U.S. Treasury auctions, foreign currencies appreciate by nearly 8 basis points relative to the U.S. dollar, while on other announcement days, returns are negligible. This pattern is consistent across the G9 currencies, with the Swiss franc and Norwegian krone seeing the largest moves. The effect has persisted over the past two decades and is especially pronounced following the global financial crisis.

Figure 1. Announcement Days and the Dollar: Average Returns. The figure shows average returns to the dollar portfolio (expressed in basis points), on days with macroeconomic announcements (MNA, dark grey), on days with macroeconomics announcements preceded by auctions (AUC & MNA, blue), other announcement days (No AUC & MNA, orange), and days with no announcements (No MNA, light grey). Error bands indicate 90% confidence intervals. The sample period is January 2000 to December 2023.

Importantly, this return pattern does not depend on the type of macro announcement (whether it’s GDP, CPI, or payrolls) or the maturity of the Treasury debt issued. The returns build gradually overnight before announcements and continue into the U.S. trading session, suggesting that these are not just quick reactions to the data but part of a broader dynamic.

The authors tie this pattern to shifts in Treasury demand. Primary dealers reduce their bids at auctions before major economic releases, constrained by risk limits. This reduction weakens Treasury demand and spills into FX markets, where the dollar depreciates as dealers adjust their positions. The effect strengthens when dealer balance sheets are more stretched, amplifying currency moves and trading volumes across markets.

Figure 4. Total Return Index: DOL Portfolio. The figure shows total return indices for a hypothetical investment of $1 U.S. dollar in the dollar portfolio (abstracting from transaction costs) made only on macroeconomic announcement days preceded by auctions (AUC & MNA, blue), all other macroeconomic announcement days not preceded by auctions (No AUC & MNA, orange), days without macroeconomic announcements (No MNA, green), and all days (Total Return, black). The black dashed lined indicates the end of the year 2008. The sample period is January 2000 to December 2023.

Krohn, Ingomar and Vala, Rishi, Auctions, Announcements, and Abnormal Returns (April 06, 2025). Available at SSRN: https://ssrn.com/abstract=5207418 or http://dx.doi.org/10.2139/ssrn.5207418

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Risk-Adjusted Trend Following

This study presents a simple trend-following strategy with a Sharpe ratio of 1.06 and a max drawdown nearly half that of the S&P 500.

The authors present a strategy that begins by calculating each stock’s excess return relative to its variance (essentially, its market-implied risk-adjusted return) over the past year. Only stocks with positive values are selected, forming a diverse candidate pool. The portfolio weights are then optimized daily using mean-variance optimization, balancing expected returns against estimated covariance while capping any single stock’s weight at 10% for diversification.

If the broader market (measured via SPY) shows negative excess return over the prior year, the strategy moves fully to cash. A final filter applies moving averages: positions are held only if the stock’s current price stays above its short-term average, which itself must be above the long-term average, effectively ensuring positions align with prevailing trends.

The performance tells the story. From 2014 to 2025, the strategy outpaces the S&P 500, growing nearly 25-fold while keeping risk in check. The Sharpe ratio reaches 1.06, compared to 0.69 for the index, and the strategy’s worst drawdown is just 17.1%, nearly half the market’s. Even after accounting for trading costs, the strategy’s outperformance persists.

Liu, Shitao, Ride the Right Horse: a Systematic Trend Strategy for Superior Return Using Portfolio Utility Optimization (March 22, 2025). Available at SSRN: https://ssrn.com/abstract=5189974 or http://dx.doi.org/10.2139/ssrn.5189974

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Mortgage Application and Default Seasonality

Mortgage lenders are more likely to deny refinance applications and make riskier loans when homebuying season peaks.

This paper explores how seasonal fluctuations in mortgage demand impact lenders’ behavior. Using nationwide mortgage application data, the authors show that lenders face capacity constraints during the spring and summer months, when home purchase applications surge.

As a result, they ration credit, not just for homebuyers, but also for homeowners seeking to refinance. Refinancing denial rates rise by nearly half a percentage point when purchase loan demand increases by 10 percent.

The boxplot of seasonal factors reveals clear peaks in mortgage demand from March to June, followed by sharp declines in winter. These capacity pressures also affect loan quality. Loans originated during these high-demand months exhibit higher default rates within three years, even after accounting for borrower credit characteristics and loan terms.

This suggests that overworked loan officers make weaker underwriting decisions under time pressure. The findings imply that the cyclical nature of the housing market not only shapes access to credit but also subtly affects financial stability.

Jo, Young and Liu, Feng, Mortgage Seasonality, Capacity Constraints, and Lender Responses (April 18, 2025). Consumer Financial Protection Bureau Office of Research Working Paper No. 25-04, Available at SSRN: https://ssrn.com/abstract=5222368 or http://dx.doi.org/10.2139/ssrn.5222368

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