FX Comovements and Their Economic Determinants

Jose Gonzalo Rangel

Journal of Financial Econometrics, 2025, vol. 23, issue 3, 4042-4064

Abstract: This article models high- and low-frequency dynamic components of FX excess return correlations and examines their relationship with economic fundamentals. A factor pricing model with time-varying betas is used to characterize these correlations. From the low-frequency components, an aggregate comovement measure is derived. This component is countercyclical relative to the U.S., as it is negatively related to economic growth and positively related to both inflation volatility and economic policy uncertainty. Idiosyncratic volatilities also drive currency comovements. I examine their cross-sectional variation and find significant impacts of inflation levels, monetary policy variables, real output growth, trade, and capital flows.

Keywords: Conditional currency comovements; currency factors; time-varying loadings; idiosyncratic volatilities; trends; economic fundamentals (search for similar items in EconPapers)
JEL-codes: C5 F31 G12 G15 (search for similar items in EconPapers)
Date: 2025
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