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Currency Value

58 Pages Posted: 22 Jun 2013 Last revised: 27 Jun 2015

Lukas Menkhoff

German Institute for Economic Research (DIW Berlin); Humboldt University of Berlin - Faculty of Economics

Lucio Sarno

City University London - Sir John Cass Business School; Centre for Economic Policy Research (CEPR)

Maik Schmeling

City University London - Sir John Cass Business School; Centre for Economic Policy Research (CEPR)

Andreas Schrimpf

Bank for International Settlements (BIS) - Monetary and Economic Department

Multiple version iconThere are 2 versions of this paper

Date Written: June 26, 2015

Abstract

We assess the properties of currency value strategies based on real exchange rates in a cross-sectional portfolio setting. We find that real exchange rates predict currency excess returns, but in a way that is inconsistent with the notion of currency value because a high valuation level forecasts a relative appreciation of the foreign currency going forward. However, adjusting real exchange rates for two key country-specific fundamentals -- productivity and the quality of export goods -- generates a measure of currency value which still predicts currency excess returns and is consistent with the spot exchange rate reverting toward fundamental value.

Keywords: Currency value, macro fundamentals, real exchange rate, predictability

JEL Classification: F31, G12, G15

Suggested Citation

Menkhoff, Lukas and Sarno, Lucio and Schmeling, Maik and Schrimpf, Andreas, Currency Value (June 26, 2015). Available at SSRN: https://ssrn.com/abstract=2282480 or http://dx.doi.org/10.2139/ssrn.2282480

Lukas Menkhoff

German Institute for Economic Research (DIW Berlin) ( email )

Mohrenstra├če 58
Berlin, 10117
Germany

Humboldt University of Berlin - Faculty of Economics ( email )

Spandauer Strasse 1
Berlin
Germany

Lucio Sarno

City University London - Sir John Cass Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

Maik Schmeling

City University London - Sir John Cass Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

Centre for Economic Policy Research (CEPR) ( email )

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

Andreas Schrimpf (Contact Author)

Bank for International Settlements (BIS) - Monetary and Economic Department ( email )

Centralbahnplatz 2
CH-4002 Basel
Switzerland

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