Macro Uncertainty and Currency Premia

85 Pages Posted: 1 Mar 2017 Last revised: 10 Mar 2019

See all articles by Pasquale Della Corte

Pasquale Della Corte

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

Aleksejs Krecetovs

Imperial College London

Date Written: March 8, 2019

Abstract

We study empirically the relation between currency excess returns and macro uncertainty, measured as forecast dispersion, on a wide set of economic indicators. We find that investment currencies deliver low returns whereas funding currencies offer a hedge when current account uncertainty is unexpectedly high. In contrast, uncertainty over other economic indicators displays a weak relation with the cross-section of currency returns. Moreover, an increase in current account uncertainty is associated with positive (negative) expected excess returns on investment (funding) currencies. This mechanism is consistent with the recent advances in exchange rate theory based on capital flows in imperfect financial markets.

Keywords: analyst forecasts, carry trade, currency risk premium, global imbalances, macro uncertainty,

JEL Classification: F14, F31, F32, F34, G12, G15.

Suggested Citation

Della Corte, Pasquale and Krecetovs, Aleksejs, Macro Uncertainty and Currency Premia (March 8, 2019). Available at SSRN: https://ssrn.com/abstract=2924766 or http://dx.doi.org/10.2139/ssrn.2924766

Pasquale Della Corte

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

Aleksejs Krecetovs (Contact Author)

Imperial College London ( email )

South Kensington Campus
Exhibition Road
London, Greater London SW7 2AZ
United Kingdom

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