Pedro Barroso

Working papers:

Cutting the Gordian Knot of Carry and Imbalances, with Frickson Kho, Florent Rouxelin, and Li Yang

Abstract: Countries' external imbalances or interest rates produce similar currency sorts on average. Disentangling the two signals, we find that carry risk premiums come entirely from interest rates. An alternative carry formed on interest rates orthogonal to external imbalances increases the Sharpe ratio by 38% and is not spanned by traditional carry or imbalance factors. Strikingly, this new orthogonal carry subsumes traditional carry. Traditional carry has well-known exposure to stock market returns and performs badly when FX volatility is high. We find these stylized facts are driven entirely by its association with imbalances factors which have similar risk attributes while orthogonal carry does not. 

Conferences / Seminars: 2016 Australasian Finance and Banking Conference (AFBC), 2016 UNSW Business School Research Fair, 2017 China International Conference in Finance (CICF), 2018 European Financial Management Association annual meeting in Milan, Spanish Finance Association XXVI Finance Forum in 2018, Católica Porto Business School, University of Queensland (Australia), and Massey University (New Zealand), 2021 Annual meeting of the Portuguese Economics Journal, FMA Europe 2024. 

What Explains Momentum When It Really Works?, with Haoxu Wang

Abstract: Puzzlingly, the literature has shown that behavioral factors capturing mispricing, the neoclassical-inspired investment q-factors, and momentum in factors can all subsume individual stock momentum. But tests subsuming momentum are unconditional while the bulk of its profits are predictable using its own lagged volatility. We compare asset pricing models conditionally, when the strategy really works, and find the unconditional fit misleading. Models fit well most times but not when profits are produced. Strikingly, momentum’s conditionality cannot be attributable to either q-factors or factor momentum. Yet, both earnings announcement returns and analyst forecast errors show strong conditionality consistent with an underreaction channel. 

Conferences / Seminars: 2020 Australasian Finance and Banking Conference (AFBC), 2021 Católica-Lisbon School of Business and Economics, CICF 2021, New Zealand Finance meeting 2021, FMA US annual meeting 2021, EFMA 2021, FMA Europe 2021, University of Liechtenstein, 2022 annual Risk Management Conference in Singapore (NUS), CEPR Advanced Forum for Financial Economics (CAFFE), ESCP, Bayes Business School, Queen Mary University of London, University of Liverpool Management School, Santander Corporate and Investment Banking, University of Gothenburg, University of Strahtclyde, Henley Business School (Reading), 16th Behavioral Finance Working Group Conference, and 2023 Luso-Brazilian Finance Network Meeting, University of Birmingham Business School.   

An International Equity and Currency Optimisation with Frictions , with Jurij-Andrei Reichenecker, Michael R. Reichenecker and Florent Rouxelin (R&R at the Review of Asset Pricing Studies)

Abstract: This study proposes a novel joint optimization approach for international portfolios, optimizing the allocation of stocks and exposure to currencies. We employ several equity characteristics including momentum, value, and size for equity allocation and carry trade, currency momentum, and currency value characteristics for currency allocation. Our out-of-sample analysis finds a 55% increase in the portfolios' Sharpe ratio, after transaction and rebalancing costs, compared to the benchmark, with no significant impact on overall volatility. This research highlights the importance of jointly optimizing both equity and currency strategies in portfolio construction, offering insights to international investors aiming to improve their risk-adjusted returns. 

Conferences / Seminars: 2018 Portuguese Finance Network conference (PFN), 2019 International Risk Management Conference in Milan, 2019 Infiniti Conference in Glasgow, Lancaster University Management School, TUM School of Management in Munich, Universidade de Macau, University of Strathclyde, 2022 FMA Applied Finance Conference at St. John's University in New York, FMA Europe 2022, 2022 fifteenth annual Risk Management Conference in Singapore (NUS), FMA USA 2023. 

Calm Your Portfolio: The Importance of Disciplining Intelligent but Fickle Forecasts in Portfolio Optimization, with Konark Saxena and Haoxu Wang

Abstract: We study portfolio optimization for the top 500 U.S. stocks using their characteristic information. To outperform value-weighted portfolios while accounting for transaction costs and managing risk, we find it essential to efficiently utilize characteristic information to predict expected returns while stabilizing both portfolio weight changes and expected volatility. We propose and test a portfolio optimization framework that incorporates turnover penalties, alternative optimized portfolios to the tangency portfolio,

and volatility caps. Portfolios based on our framework yield more stable weights and consistently outperform value-weighted portfolios across various metrics. These results

remain robust across different covariance and mean estimators, including advanced machine learning and artificial intelligence approaches.

Conferences / Seminars: ESCP Business School, University of Liechtenstein, the 2024 China International Conference in Finance (CICF), University of York Asset Pricing Workshop, the 2024 European Financial Management Association (EFMA) annual meeting, the 2023 Financial Markets and Corporate Governance Conference (FMCG), the 17th International Conference on Computational and Financial Econometrics (CFE), and the 10th Asset Pricing Breakfast in Paris. 

News:

February 16, 2016 - My research on momentum featured in BusinessThink, UNSW's Business newsletter: https://www.businessthink.unsw.edu.au/articles/next-wave-yes-momentum-investing-can-be-rewarding . 

July 1, 2016 - Opinion article on Brexit in Jornal de Negocios (the leading Economics / Business newspaper in Portugal): http://www.jornaldenegocios.pt/opiniao/detalhe/brexit_quanto_custa.html 

July 1, 2017 - My joint paper with Paulo Maio Managing the Risk of the 'Betting-Against-Beta' Anomaly: Does It Pay to Bet Against Beta? won the WRDS Best Conference paper award in EFMA 2017.

January 17, 2018 - My post on CFA's blog on managing the risk of momentum and other factors: https://blogs.cfainstitute.org/investor/2018/01/17/timing-the-market-momentum-and-beyond/ 

February 16, 2021 - My opinion on bitcoin prices in the news in Antena 1 (around minute 7:30)- https://www.rtp.pt/noticias/noticiario-antena1/15h00-edicao-de-nuno-carvalho_a1_1297910  

April 17, 2025 - commented on TV (Canal Now) the current state of financial markets and the ECB stance on monetary policy, namely the likely outcome of its meeting to decide on interest rates.