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Attractive and non-attractive currencies

Philippe Dupuy, Jessica James and Ian W. Marsh

Journal of International Money and Finance, 2021, vol. 110, issue C

Abstract: In the foreign exchange market, time-varying transaction costs and interest rates may define the time-varying set of attractive currencies for investors. Our study shows that when the currencies are attractive, they tend to deviate from the uncovered interest rate parity and to comove with the global stochastic discount factor (SDF). Inversely, when they are non-attractive, currencies tend to conform more closely to uncovered interest parity and do not comove with the global SDF. As a consequence, both investors and policy makers may want to know the status of a currency as it conveys important information about the future return of the currency. We illustrate our point in a sample including 26 currencies over the period 1985--2017.

Keywords: Exchange rate; Carry trade; Bid-ask spread; Risk premium (search for similar items in EconPapers)
JEL-codes: F31 G12 (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1016/j.jimonfin.2020.102253

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