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The Quanto Theory of Exchange Rates

Lukas Kremens () and Ian Martin ()

No 11970, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We present a new, theoretically motivated, forecasting variable for exchange rates that is based on the prices of quanto index contracts, and show via panel regressions that the quanto forecast variable is a statistically and economically significant predictor of currency appreciation. We also test the quanto variable's ability to forecast differential currency appreciation out of sample, and find that it outperforms predictions based on uncovered interest parity, on purchasing power parity, and on a random walk.

Keywords: carry trade; currency; Exchange rate; exchange rate forecast; Forecasting; predictability; quanto contracts (search for similar items in EconPapers)
JEL-codes: F31 F37 F47 G12 G15 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-for and nep-mon
Date: 2017-04
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Journal Article: The Quanto Theory of Exchange Rates (2019) Downloads
Working Paper: The quanto theory of exchange rates (2019) Downloads
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