What do stock markets tell us about exchange rates?

Gino Cenedese (gino.cenedese@fulcrumasset.com), Richard Payne (richard.payne@city.ac.uk), Lucio Sarno and Giorgio Valente (valentegiorgio@icloud.com)

No 537, Bank of England working papers from Bank of England

Abstract: The sign of the correlation between equity returns and exchange rate returns can be positive or negative in theory. Using data for a broad set of 42 countries, we find that exchange rate movements are in fact unrelated to differentials in country-level equity returns. Consequently, a trading strategy that invests in countries with the highest expected equity returns and shorts those with the lowest generates substantial returns and Sharpe ratios. These returns partially reflect compensation for global equity volatility risk, but significant excess returns remain after controlling for exposure to standard risk factors.

Keywords: Empirical asset pricing; exchange rates; international asset allocation (search for similar items in EconPapers)
JEL-codes: F31 G15 (search for similar items in EconPapers)
Pages: 53 pages
Date: 2015-07-24
New Economics Papers: this item is included in nep-fmk and nep-ifn
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (18)

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Related works:
Journal Article: What Do Stock Markets Tell Us about Exchange Rates? (2016)
Working Paper: What Do Stock Markets Tell Us About Exchange Rates? (2015)
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