Currency Premia and Global Imbalances

73 Pages Posted: 18 Apr 2016

See all articles by Pasquale Della Corte

Pasquale Della Corte

Imperial College Business School; Centre for Economic Policy Research (CEPR)

Steven J. Riddiough

University of Melbourne

Lucio Sarno

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

Multiple version iconThere are 2 versions of this paper

Date Written: February 2016

Abstract

We show that a global imbalance risk factor that captures the spread in countries' external imbalances and their propensity to issue external liabilities in foreign currency explains the cross-sectional variation in currency excess returns. The economic intuition is simple: net debtor countries offer a currency risk premium to compensate investors willing to finance negative external imbalances because their currencies depreciate in bad times. This mechanism is consistent with exchange rate theory based on capital flows in imperfect financial markets. We also find that the global imbalance factor is priced in cross sections of other major asset markets.

Keywords: carry trade, currency risk premium, foreign exchange excess returns, global imbalances

JEL Classification: F31, F37, G12, G15

Suggested Citation

Della Corte, Pasquale and Riddiough, Steven J. and Sarno, Lucio, Currency Premia and Global Imbalances (February 2016). CEPR Discussion Paper No. DP11129. Available at SSRN: https://ssrn.com/abstract=2766420

Pasquale Della Corte (Contact Author)

Imperial College Business School ( email )

South Kensington Campus
Exhibition Road
London, SW7 2AZ
United Kingdom
+44(0)20 759 49331 (Phone)

HOME PAGE: http://sites.google.com/view/pasqualedellacorte

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Steven J. Riddiough

University of Melbourne ( email )

Faculty of Business and Economics
Level 12 198 Berkeley Street
Melbourne, Victoria 3010
Australia
+61 (0)3834 40044 (Phone)

HOME PAGE: http://www.stevenriddiough.com

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)

London
United Kingdom

Register to save articles to
your library

Register

Paper statistics

Downloads
1
Abstract Views
236
PlumX Metrics