Exchange rates and monetary policy uncertainty

Philippe Mueller (), Alireza Tahbaz-Salehi and Andrea Vedolin

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

Abstract: We document that a trading strategy that is short the U.S. dollar and long other currencies exhibits significantly larger excess returns on days with scheduled Federal Open Market Committee (FOMC) announcements. We also show that these excess returns (i) are higher for currencies with higher interest rate differentials vis-à-vis the U.S.; (ii) increase with uncertainty about monetary policy; and (iii) intensify when the Federal Reserve adopts a policy of monetary easing. We interpret these excess returns as a compensation for monetary policy uncertainty within a parsimonious model of constrained financiers who intermediate global demand for currencies.

Keywords: monetary policy; foreign exchange; uncertainty (search for similar items in EconPapers)
JEL-codes: E52 E58 F31 (search for similar items in EconPapers)
Pages: 41 pages
Date: 2016-01-15
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http://eprints.lse.ac.uk/118998/ Open access version. (application/pdf)

Related works:
Journal Article: Exchange Rates and Monetary Policy Uncertainty (2017)
Working Paper: Exchange rates and monetary policy uncertainty (2017)
Working Paper: Exchange rates and monetary policy uncertainty (2016)
Working Paper: Exchange Rates and Monetary Policy Uncertainty (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:118998

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