Exchange rate return predictability in times of geopolitical risk

Bernard Njindan Iyke, Dinh Phan () and Paresh Kumar Narayan

International Review of Financial Analysis, 2022, vol. 81, issue C

Abstract: We develop the hypothesis that geopolitical risk predicts exchange rate returns. Using data on 17 countries, we demonstrate that the information content embedded in geopolitical risk is economically useful and can improve the forecast accuracy of exchange rate returns. We show that geopolitical risk predicts 10 out of 17 (59%) exchange rate returns in in-sample tests while in out-of-sample tests predictability is found for 88% of currencies. Buy and sell signals generated from our model lead to higher returns compared to the historical average model. Our model delivers excess profits relative to the benchmark model in 11 out of 17 (65%) currencies.

Keywords: Exchange rate returns; Geopolitical risk; Predictability; Trading strategies (search for similar items in EconPapers)
JEL-codes: D81 F31 F37 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (24)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:81:y:2022:i:c:s1057521922000692

DOI: 10.1016/j.irfa.2022.102099

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