The Quanto Theory of Exchange Rates

Lukas Kremens and Ian Martin

American Economic Review, 2019, vol. 109, issue 3, 810-43

Abstract: We present a new identity that relates expected exchange rate appreciation to a risk-neutral covariance term, and use it to motivate a currency forecasting variable based on the prices of quanto index contracts. We show via panel regressions that the quanto forecast variable is an economically and statistically significant predictor of currency appreciation and of excess returns on currency trades. Out of sample, the quanto variable outperforms predictions based on uncovered interest parity, on purchasing power parity, and on a random walk as a forecaster of differential (dollar-neutral) currency appreciation.

JEL-codes: C53 E43 F31 F37 G12 G15 (search for similar items in EconPapers)
Date: 2019
Note: DOI: 10.1257/aer.20180019
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Citations: View citations in EconPapers (36)

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Related works:
Working Paper: The quanto theory of exchange rates (2019)
Working Paper: The Quanto Theory of Exchange Rates (2017)
Working Paper: The quanto theory of exchange rates (2017)
Working Paper: The quanto theory of exchange rates (2017)
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