Currency Premia and Global Imbalances

Pasquale Della Corte, Steven Riddiough and Lucio Sarno

No 11129, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We show that a global imbalance risk factor that captures the spread in countriesÂ’external imbalances and their propensity to issue external liabilities in foreign currency explains the cross-sectional variation in currency excess returns. The economic intuition is simple: net debtor countries offer a currency risk premium to compensate investors willing to finance negative external imbalances because their currencies depreciate in bad times. This mechanism is consistent with exchange rate theory based on capital flows in imperfect financial markets. We also find that the global imbalance factor is priced in cross sections of other major asset markets.

Keywords: Currency risk premium; Global imbalances; Foreign exchange excess returns; Carry trade (search for similar items in EconPapers)
JEL-codes: F31 F37 G12 G15 (search for similar items in EconPapers)
Date: 2016-02
New Economics Papers: this item is included in nep-cba, nep-ifn and nep-opm
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Citations: View citations in EconPapers (102)

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Journal Article: Currency Premia and Global Imbalances (2016)
Working Paper: Currency Premia and Global Imbalances (2015)
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