Sovereign momentum currency returns

Giovanni Calice and Ming-Tsung Lin

International Review of Financial Analysis, 2024, vol. 96, issue PB

Abstract: We study the relationship between cross-sectional sovereign credit risk and currency spot prices. We find that past (up to 12-month average) sovereign credit risk, measured by sovereign credit default swap (CDS) spreads, predict future currency spot returns. In particular, we document a significant cross-sectional currency portfolio spread in excess of the risk-free rate of return (up to 9.6% p.a.) between the highest and the lowest quintile sovereign CDS spreads. Overall, our results indicate that sovereign credit risk is systematically important for currency returns. Moreover, the level of sovereign credit risk has a persistent effect on currency returns which is consistent with a sovereign momentum effect.

Keywords: Sovereign credit risk; Sovereign momentum risk; Sovereign credit default swap; Currency return (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:96:y:2024:i:pb:s1057521924004046

DOI: 10.1016/j.irfa.2024.103472

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