The trade imbalance network and currency returns

Ai Jun Hou, Lucio Sarno and Xiaoxia Ye

Journal of Financial Economics, 2025, vol. 172, issue C

Abstract: We introduce in the theory of Gabaix and Maggiori (2015) a network structure to capture the complexity of the balance sheets of financial intermediaries, using the Leontief inverse-based centrality. We use this framework in a multi-country world with imperfect financial markets to study how currency risk premia are connected to financiers’ risk bearing capacity. Guided by the theory, we construct a Centrality Based Characteristic (CBC), based on the centrality of the trade imbalance network and variance–covariance matrix of currency returns. Sorting currencies on CBC generates a high Sharpe ratio, and the resulting excess returns reflect a novel source of predictability.

Keywords: Trade imbalance network; Currency premia; Carry trade; Network centrality (search for similar items in EconPapers)
JEL-codes: F31 F37 G12 G15 (search for similar items in EconPapers)
Date: 2025
References: Add references at CitEc
Citations:

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0304405X25001205
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:172:y:2025:i:c:s0304405x25001205

DOI: 10.1016/j.jfineco.2025.104112

Access Statistics for this article

Journal of Financial Economics is currently edited by G. William Schwert

More articles in Journal of Financial Economics from Elsevier
Bibliographic data for series maintained by Catherine Liu ().