Currency Premia and Global Imbalances

Steven Riddiough, Lucio Sarno and Pasquale Della Corte
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Steven Riddiough: University of Warwick
Pasquale Della Corte: Imperial College London

No 1215, 2015 Meeting Papers from Society for Economic Dynamics

Abstract: We show that a global imbalance risk factor that captures the spread in countries' external imbalances and their propensity to issue external liabilities in foreign currency explains the cross-sectional variation in currency excess returns. The economic intuition is simple: net debtor countries offer a currency risk premium to compensate investors willing to finance negative external imbalances because their currencies depreciate in bad times. This mechanism is consistent with recent exchange rate theory based on capital flows in imperfect financial markets. We also find that the global imbalance factor is priced in the cross sections of other major asset markets.

Date: 2015
New Economics Papers: this item is included in nep-ifn and nep-opm
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Citations: View citations in EconPapers (4)

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Journal Article: Currency Premia and Global Imbalances (2016)
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