Common Risk Factors in Cross-Sectional FX Options Returns

Xuanchen Zhang, Raymond H Y So*, Tarik Driouchi

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review


We identify a comprehensive list of thirty-eight characteristics for predicting cross-sectional FX options returns. We find that three factors - long-term straddle momentum, implied volatility, and illiquidity - can generate economically and statistically significant risk premia not explained by other return predictors. Meanwhile, the predictability of the other characteristics becomes insignificant after accounting for the FX option three-factor model. The significance of the three factors is confirmed through a series of robustness tests covering different data sources, alternative options strategies, diversification effects, bootstrapping, and omitting crisis years.
Original languageEnglish
Article numberrfae002
Pages (from-to)897-944
Number of pages48
JournalReview of Finance
Issue number3
Early online date18 Jan 2024
Publication statusPublished - 1 May 2024


Dive into the research topics of 'Common Risk Factors in Cross-Sectional FX Options Returns'. Together they form a unique fingerprint.

Cite this