Beyond Carry: The Prospective Interest Rate Differential and Currencuy Excess Returns

Mike Dong, Shingo Goto, Yan Xu and Yuzhao Zhang
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Mike Dong: U of California, Riverside
Shingo Goto: U of Rhode Island
Yan Xu: Ohio State U
Yuzhao Zhang: HKU

Working Paper Series from Ohio State University, Charles A. Dice Center for Research in Financial Economics

Abstract: We use a Beveridge-Nelson decomposition to link expected foreign-currency excess returns to the "prospective interest rate differential"--the infinite sum of expected future interest rate differentials. Empirically, we find our prospective interest rate differential is a stronger predictor of currency excess returns than carry, in both portfolio sorts and Fama-MacBeth regressions. A factor based on the prospective interest rate differential is also useful in explaining the returns of a broad set of currency test portfolios.

JEL-codes: E43 F31 G12 G15 (search for similar items in EconPapers)
Date: 2024-01
New Economics Papers: this item is included in nep-inv and nep-opm
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Persistent link: https://EconPapers.repec.org/RePEc:ecl:ohidic:2024-03

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