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 show that these excess returns (i) are higher for currencies with higher interest rate differentials vis-à-vis the United States, (ii) increase with uncertainty about monetary policy, and (iii) increase further when the Federal Reserve adopts a policy of monetary easing. We interpret these excess returns as compensation for monetary policy uncertainty within a parsimonious model of constrained financiers who intermediate global demand for currencies.

Keywords: currency risk; liquidity; markets (search for similar items in EconPapers)
JEL-codes: F3 G3 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2017-06-01
New Economics Papers: this item is included in nep-cba, nep-ifn, nep-mon and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (72)

Published in Journal of Finance, 1, June, 2017, 72(3), pp. 1213 - 1252. ISSN: 0022-1082

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http://eprints.lse.ac.uk/77256/ Open access version. (application/pdf)

Related works:
Journal Article: 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)
Working Paper: Exchange Rates and Monetary Policy Uncertainty (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:77256

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