Currency Value

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

See all articles by Lukas Menkhoff

Lukas Menkhoff

Kiel Institute for the World Economy; German Institute for Economic Research (DIW Berlin); Humboldt-Universität zu Berlin

Lucio Sarno

University of Cambridge - Judge Business School; Centre for Economic Policy Research (CEPR)

Maik Schmeling

Goethe University Frankfurt - Department of Finance; Centre for Economic Policy Research (CEPR)

Andreas Schrimpf

Bank for International Settlements (BIS) - Monetary and Economic Department; Centre for Economic Policy Research (CEPR); University of Tuebingen

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

Kiel Institute for the World Economy ( email )

P.O. Box 4309
Kiel, Schleswig-Hosltein D-24100
Germany

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

Mohrenstraße 58
Berlin, 10117
Germany

Humboldt-Universität zu Berlin ( email )

Humboldt Universität
Unter den Linden 6
Berlin, 10099
Germany

Lucio Sarno

University of Cambridge - Judge Business School ( email )

Trumpington Street
Cambridge, CB2 1AG
United Kingdom

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Maik Schmeling

Goethe University Frankfurt - Department of Finance ( email )

House of Finance
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, Hessen 60323
Germany

HOME PAGE: http://sites.google.com/site/maikschmeling/

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Andreas Schrimpf (Contact Author)

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

Centralbahnplatz 2
CH-4002 Basel
Switzerland

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

University of Tuebingen ( email )

Wilhelmstr. 19
72074 Tuebingen, Baden Wuerttemberg 72074
Germany

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