Business Cycles and Currency Returns
74 Pages Posted: 31 Jan 2017 Last revised: 13 Sep 2019
Date Written: September 11, 2019
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: Suggested Citation