Business Cycles and Currency Returns

Lucio Sarno, Ric Colacito and Steven Riddiough

No 14015, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We find a strong link between currency excess returns and the relative strength of the business cycle. Buying currencies of strong economies and selling currencies of weak economies generates high returns both in the cross section and time series of countries. These returns stem primarily from spot exchange rate predictability, are uncorrelated with common currency investment strategies, and cannot be understood using traditional currency risk factors in either unconditional or conditional asset pricing tests. We also show that a business cycle factor implied by our results is priced in a broad currency cross section.

Keywords: Exchange rates; Currency risk premium; Business cycles; Long-run risk (search for similar items in EconPapers)
JEL-codes: F31 G12 G15 (search for similar items in EconPapers)
Date: 2019-09
New Economics Papers: this item is included in nep-ifn and nep-opm
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Citations: View citations in EconPapers (5)

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Related works:
Journal Article: Business cycles and currency returns (2020)
Working Paper: Business Cycles and Currency Returns (2019)
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