Country Fundamentals and Currency Excess Returns

Daehwan Kim () and Chi-Young Song ()
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Daehwan Kim: Konkuk University
Chi-Young Song: Kookmin University

East Asian Economic Review, 2014, vol. 18, issue 2, 111-142

Abstract: We examine whether country fundamentals help explain the cross-section of currency excess returns. For this purpose, we consider fundamental variables such as default risk, foreign exchange rate regime, capital control as well as interest rate in the multi-factor model framework. Our empirical results show that fundamental factors explain a large part of the cross-section of currency excess returns. The zero-intercept restriction of the factor model is not rejected for most currencies. They also reveal that our factor model with country fundamentals performs better than a factor model with usual investment-style factors. Our main empirical results are based on 2001-2010 balanced panel data of 19 major currencies. This paper may fill the gap between country fundamentals and practitioners' strategies on currency investment.

Keywords: Currency Excess Returns; Country Fundamentals; Factor Model; Fundamental Factors; Investment-style Factors (search for similar items in EconPapers)
JEL-codes: F31 G12 G15 (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:ris:eaerev:0041

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