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Currency Value

Lucio Sarno, Lukas Menkhoff, Maik Schmeling and Andreas Schrimpf

No 11324, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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 resulting 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.

Keywords: Currency value; Macro fundamentals; Real exchange rate; Predictability (search for similar items in EconPapers)
JEL-codes: F31 G12 G15 (search for similar items in EconPapers)
Date: 2016-06
New Economics Papers: this item is included in nep-ifn, nep-mon and nep-opm
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