The Share of Systematic Variation in Bilateral Exchange Rates

54 Pages Posted: 19 Sep 2011 Last revised: 30 Oct 2015

See all articles by Adrien Verdelhan

Adrien Verdelhan

National Bureau of Economic Research (NBER); Massachusetts Institute of Technology (MIT) - Sloan School of Management

Date Written: July 1, 2015

Abstract

Sorting countries by their dollar currency betas produces a novel cross-section of average currency excess returns. A slope factor (long in high beta currencies and short in low beta currencies) accounts for this cross-section of currency risk premia. This slope factor is orthogonal to the high-minus-low carry trade factor built from portfolios of countries sorted by their interest rates. The two high-minus-low risk factors account for 18% to 80% of the monthly exchange rate movements. The two risk factors suggest that stochastic discount factors in complete markets' models should feature at least two global shocks to describe exchange rates.

Keywords: exchange rates, forward premium puzzle, risk premium

JEL Classification: F31

Suggested Citation

Verdelhan, Adrien and Verdelhan, Adrien, The Share of Systematic Variation in Bilateral Exchange Rates (July 1, 2015). Journal of Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1930516 or http://dx.doi.org/10.2139/ssrn.1930516

Adrien Verdelhan (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-416
Cambridge, MA 02142
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
2,610
Abstract Views
9,647
Rank
9,560
PlumX Metrics