Business Cycles and Currency Returns

74 Pages Posted: 31 Jan 2017 Last revised: 13 Sep 2019

See all articles by Ric Colacito

Ric Colacito

University of North Carolina Kenan-Flagler Business School; NBER

Steven Riddiough

University of Melbourne

Lucio Sarno

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

Multiple version iconThere are 3 versions of this paper

Date Written: September 11, 2019

Abstract

We find a strong link between currency excess returns and the relative strength of the business cycle. Buying currencies of strong economies and selling currencies of weak economies generates high returns both in the cross section and time series of countries. These returns stem primarily from spot exchange rate predictability, are uncorrelated with common currency investment strategies, and cannot be understood using traditional currency risk factors in either unconditional or conditional asset pricing tests. We also show that a business cycle factor implied by our results is priced in a broad currency cross section.

Keywords: exchange rates; currency risk premium; business cycles; long-run risk.

JEL Classification: F31, G12, G15

Suggested Citation

Colacito, Riccardo and Riddiough, Steven and Sarno, Lucio, Business Cycles and Currency Returns (September 11, 2019). Available at SSRN: https://ssrn.com/abstract=2906600 or http://dx.doi.org/10.2139/ssrn.2906600

Riccardo Colacito

University of North Carolina Kenan-Flagler Business School ( email )

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States

HOME PAGE: http://drric.web.unc.edu/

NBER ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Steven Riddiough (Contact Author)

University of Melbourne ( email )

Faculty of Business and Economics
Level 11 198 Berkeley Street
Melbourne, Victoria 3010
Australia
+61 (0)3834 40044 (Phone)

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

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

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