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Business cycles and currency returns

Riccardo Colacito, Steven J. Riddiough and Lucio Sarno ()

Journal of Financial Economics, 2020, vol. 137, issue 3, 659-678

Abstract: We find a strong link between currency excess returns and the relative strength of the business cycle. Buying currencies of strong economies and selling currencies of weak economies generates high returns both in the cross-section and time series of countries. These returns stem primarily from spot exchange rate predictability, are uncorrelated with common currency investment strategies, and cannot be understood using traditional currency risk factors in either unconditional or conditional asset pricing tests. We also show that a business cycle factor implied by our results is priced in a broad currency cross section.

Keywords: Exchange rates; Currency risk premium; Business cycles; Long-run risk (search for similar items in EconPapers)
JEL-codes: G12 G15 F31 (search for similar items in EconPapers)
Date: 2020
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Related works:
Working Paper: Business Cycles and Currency Returns (2019) Downloads
Working Paper: Business Cycles and Currency Returns (2019) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:137:y:2020:i:3:p:659-678

DOI: 10.1016/j.jfineco.2020.04.005

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