Is There a Size Effect in the FX Market?
30 Pages Posted: 16 Feb 2012 Last revised: 11 Mar 2014
Date Written: March 11, 2014
Abstract
Is there a size effect in the FX market? That is, do the currencies of small countries generate higher excess returns than the currencies of large countries? Using the market capitalization of a country as the measure of size, we document a strong size effect in the FX market. Size effect persists after controlling for the market and forward premium factors of Lustig, Roussanov, and Verdelhan (2008). It is stronger among low interest-rate currencies, among developed-market currencies, and in the pre-2000 period. The evidence for a size effect, however, is weaker when we limit the analysis to the currencies with active forward markets.
Keywords: Size effect, currency excess return, market capitalization, forward premium, forward market
JEL Classification: F31, G12, G15
Suggested Citation: Suggested Citation