Current Account Uncertainty and Currency Premia

Pasquale Della Corte () and Aleksejs Krecetovs ()
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Pasquale Della Corte: Department of Finance, Imperial College London, London SW7 2AZ, United Kingdom
Aleksejs Krecetovs: Brevan Howard Centre, Imperial College London, London SW7 2AZ, United Kingdom

Management Science, 2024, vol. 70, issue 9, 5795-5815

Abstract: We empirically study the relationship between currency excess returns and current account uncertainty, measured as forecast dispersion. We find that investment currencies deliver low returns, whereas funding currencies offer a hedge when current account uncertainty is unexpectedly high. Moreover, an increase in current account uncertainty is associated with higher expected future excess returns on investment currencies. This mechanism is consistent with the recent advances in exchange rate theory based on capital flows in imperfect financial markets.

Keywords: analyst forecasts; carry trade; currency risk premia; global imbalances; macro uncertainty (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:70:y:2024:i:9:p:5795-5815

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