Macro uncertainty and currency premia

Aleksejs Krecetovs and Pasquale Della Corte
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Aleksejs Krecetovs: Imperial College London
Pasquale Della Corte: Imperial College London

No 624, 2016 Meeting Papers from Society for Economic Dynamics

Abstract: This paper studies empirically the relation between macro uncertainty shocks and the cross-section of currency excess returns. We measure uncertainty over macro variables such as current account, inflation rate, short-term interest rate, real economic growth and foreign exchange rate using the cross-sectional dispersion of market participants’ expectations from two international surveys of macro forecasts. We ï¬ nd evidence that investment currencies deliver low returns whereas funding currencies offer a hedge when current account uncertainty is unexpectedly high. In contrast, uncertainty over other macro indicators displays no signiï¬ cant relation with the cross-section of currency excess returns. Our results are consistent with a recent theory of exchange rate determination based on capital flows in imperfect ï¬ nancial markets.

Date: 2016
New Economics Papers: this item is included in nep-ifn and nep-opm
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed016:624

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