Emerging Market Currency Excess Returns

54 Pages Posted: 24 Nov 2008 Last revised: 7 Apr 2010

See all articles by Stephen W. Gilmore

Stephen W. Gilmore

AIG Financial Products - Banque AIG

Fumio Hayashi

National Graduate Institute for Policy Studies; Harvard University - Department of Economics

Date Written: April 2010

Abstract

This is a descriptive paper on the excess return from 20 internationally tradable emerging market (EM) currencies. It has two contributions. First, we document stylized facts about EM currencies. For the period starting in the second half of the 1990s and including the two major crises (the 1997 East Asian crisis and the recent Lehman shock), we find that the basket of EM currencies has provided significant equity-like excess returns against major currencies, but with low volatility. After confirming that the forward premium puzzle is less prevalent for EM currencies than for major currencies, we find that the forward premium for majors, rather than that for EM currencies, is a better predictor of the EM excess return. Second, our calculation takes into account institutional features of the foreign exchange market such as bid/offer spreads, FX (foreign exchange) swaps, and lags in settling spot contracts.

Keywords: Emerging Market Currencies, Risk Premium, Bid/Offer Spreads, FX Swaps

JEL Classification: F31, G11, G15

Suggested Citation

Gilmore, Stephen W. and Hayashi, Fumio, Emerging Market Currency Excess Returns (April 2010). Available at SSRN: https://ssrn.com/abstract=1306142 or http://dx.doi.org/10.2139/ssrn.1306142

Stephen W. Gilmore

AIG Financial Products - Banque AIG ( email )

1 Curzon Street
London, W1J 5RT
United Kingdom

Fumio Hayashi (Contact Author)

National Graduate Institute for Policy Studies ( email )

Roppongi 7-22-1
Minato-ku
Tokyo, 106-0032
Japan

HOME PAGE: http://https://sites.google.com/site/fumiohayashi/home

Harvard University - Department of Economics

Littauer Center
Cambridge, MA 02138
United States

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