Foreign currency returns and systematic risks

Victoria Galsband and Thomas Nitschka

No 2011-03, Working Papers from Swiss National Bank

Abstract: The decomposition of the market return into its cash-flow and discount-rate news driven components reveals that excess returns on low forward discount currency portfolios load positively on "good" news about the stock market's discount rates while high forward discount currencies load negatively on this news. Average currency portfolio returns are hence explained by different sensitivities to discount-rate news. A two-beta version of the CAPM, distinguishing between cash-flow and discount-rate betas, is able to price both currency and stock portfolio returns at the same time. Finally, we find that the relation between stock market news and foreign currency returns varies across the two either discount-rate news or both discount-rate and cash-flow news driven stock market booms of the past two decades.

Keywords: Currency returns; cash-flow news; discount-rate news; market return; UIP (search for similar items in EconPapers)
JEL-codes: F31 F37 G15 (search for similar items in EconPapers)
Pages: 39 pages
Date: 2011
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Citations: View citations in EconPapers (3)

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Journal Article: Foreign Currency Returns and Systematic Risks (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:snb:snbwpa:2011-03

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