Geopolitical risk and currency returns

Xi Liu and Xueyong Zhang

Journal of Banking & Finance, 2024, vol. 161, issue C

Abstract: This study investigates the relationship between geopolitical risk (GPR) and currency excess returns. A zero-cost strategy that buys higher GPR currencies and sells lower GPR currencies generates a significant excess return of 5.72% per year. These returns contain information that goes beyond traditional currency investment strategies and cannot be explained by existing risk factors in asset pricing tests. Furthermore, the GPR factor is positively priced in broad cross sections of currency portfolios and in individual currencies. Further investigation reveals that the observed return predictability of GPR for currency returns stems from the country-specific idiosyncratic risk component and the regional risk component.

Keywords: Exchange rates; Currency risk premium; Geopolitical risk; Carry trade (search for similar items in EconPapers)
JEL-codes: F31 G12 G15 (search for similar items in EconPapers)
Date: 2024
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:161:y:2024:i:c:s0378426624000177

DOI: 10.1016/j.jbankfin.2024.107097

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