The quanto theory of exchange rates

Lukas Kremens and Ian Martin

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

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 and of excess returns on currency trades. 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.

JEL-codes: F31 F37 F47 G12 G15 (search for similar items in EconPapers)
Pages: 60 pages
Date: 2017-11-01
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Downloads: (external link)
http://eprints.lse.ac.uk/118945/ Open access version. (application/pdf)

Related works:
Journal Article: The Quanto Theory of Exchange Rates (2019)
Working Paper: The quanto theory of exchange rates (2019)
Working Paper: The Quanto Theory of Exchange Rates (2017)
Working Paper: The quanto theory of exchange rates (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:118945

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