Is There a Credit Risk Anomaly in FX Markets?

11 Pages Posted: 31 Oct 2015 Last revised: 26 May 2016

See all articles by Klaus Grobys

Klaus Grobys

University of Vaasa

Jari-Pekka Heinonen

University of Vaasa - Department of Accounting and Finance

Date Written: October 31, 2015

Abstract

This paper explores whether a link between sovereign credit ratings and currency returns exists. Perhaps contrary to expectations, it finds that currencies of countries with higher credit risk tend to generate lower returns than those with a lower credit risk. The credit risk spread cannot be explained by standard risk factors.

Keywords: Credit risk, FX markets, currency markets, carry trade, anomaly

JEL Classification: G12, G14

Suggested Citation

Grobys, Klaus and Heinonen, Jari-Pekka, Is There a Credit Risk Anomaly in FX Markets? (October 31, 2015). Finance Research Letters, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2684465 or http://dx.doi.org/10.2139/ssrn.2684465

Klaus Grobys (Contact Author)

University of Vaasa ( email )

P.O. Box 700
Wolffintie 34
FIN-65101 Vaasa
Finland

Jari-Pekka Heinonen

University of Vaasa - Department of Accounting and Finance ( email )

P.O. Box 700
FIN-65101 Vaasa, FI-65101
Finland

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