Business Cycles and Currency Returns

Working Paper No. 26299 We find a strong link between currency excess returns and the relative strength of the business cycle. Buying currencies of strong economies and selling currencies of weak economies generates high returns both in the cross section and time series of countries. These returns s...

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Bibliographic Details
Published inNBER Working Paper Series p. 26299
Format Paper
LanguageEnglish
Published Cambridge National Bureau of Economic Research, Inc 01.09.2019
Subjects
American dollar
Business cycles
Business schools
Currency
Economic models
Economic theory
Foreign exchange markets
Foreign exchange rates
Industrial production
Interest rates
Macroeconomics
Yen
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Summary:Working Paper No. 26299 We find a strong link between currency excess returns and the relative strength of the business cycle. Buying currencies of strong economies and selling currencies of weak economies generates high returns both in the cross section and time series of countries. These returns stem primarily from spot exchange rate predictability, are uncorrelated with common currency investment strategies, and cannot be understood using traditional currency risk factors in either unconditional or conditional asset pricing tests. We also show that a business cycle factor implied by our results is priced in a broad currency cross section.
ISSN:0898-2937
DOI:10.3386/w26299