Currency excess returns and global downside market risk

Victoria Galsband and Thomas Nitschka

No 2013-07, Working Papers from Swiss National Bank

Abstract: We take the perspective of a US investor to assess cross-sectional differences in 19 bilateral, conditional currency excess returns in an empirical model that distinguishes between US-specific and global risks, conditional on US bull (upside) or bear (downside) markets. At first glance, our results suggest that global downside risk is compensated in average bilateral currency excess returns. Further analysis, however, reveals that downside risk and financial market volatility exposures are closely related. Moreover, the downside risk evidence is mostly driven by emerging markets' currencies. We conclude that downside risk models do not fully address the issue of foreign currency excess returns being largely unrelated to standard risk factors.

Keywords: CAPM; downside risk; exchange rate; forward premium puzzle; uncoveredinterest rate parity; upside risk (search for similar items in EconPapers)
JEL-codes: F31 G15 (search for similar items in EconPapers)
Pages: 58 pages
Date: 2013
New Economics Papers: this item is included in nep-ifn, nep-opm and nep-rmg
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Citations: View citations in EconPapers (2)

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Journal Article: Currency excess returns and global downside market risk (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:snb:snbwpa:2013-07

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