The Trade Imbalance Network and Currency Returns

Ai Jun Hou, Lucio Sarno and Xiaoxia Ye

No 20163, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We introduce in the theory of Gabaix and Maggiori (2015) a network structure to capture the complexity of the balance sheets of financial intermediaries, using the Leontief inverse-based centrality. We use this framework in a multi-country world with imperfect financial markets to study how currency risk premia are connected to financiers’ risk bearing capacity. Guided by the theory, we construct a Centrality Based Characteristic (CBC), based on the centrality of the trade imbalance network and variance-covariance matrix of currency returns. Sorting currencies on CBC generates a high Sharpe ratio, and the resulting excess returns reflect a novel source of predictability.

Keywords: Carry trade; Network centrality (search for similar items in EconPapers)
JEL-codes: F31 F37 G12 G15 (search for similar items in EconPapers)
Date: 2025-04
References: Add references at CitEc
Citations:

Downloads: (external link)
https://cepr.org/publications/DP20163 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:20163

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP20163

Access Statistics for this paper

More papers in CEPR Discussion Papers from Centre for Economic Policy Research 33 Great Sutton Street, London EC1V 0DX, UK.
Bibliographic data for series maintained by CEPR ().