Currency Value

Lukas Menkhoff, Lucio Sarno, Maik Schmeling and Andreas Schrimpf

The Review of Financial Studies, 2017, vol. 30, issue 2, 416-441

Abstract: We assess the properties of currency value strategies based on real exchange rates. We find that real exchange rates have predictive power for the cross-section of currency excess returns. However, adjusting real exchange rates for key country-specific fundamentals (productivity, the quality of export goods, net foreign assets, and output gaps) better isolates information related to the currency risk premium. In turn, the resultant measure of currency value displays considerably stronger predictive power for currency excess returns. Finally, the predictive information content in our currency value measure is distinct from that embedded in popular currency strategies, such as carry and momentum.Received June 26, 2015; accepted June 8, 2016 by Editor Stefan Nagel.

JEL-codes: F31 G12 G15 (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (6)

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Working Paper: Currency Value (2016)
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