Corruption, Carry Trades, and the Cross Section of Currency Returns

29 Pages Posted: 2 May 2017 Last revised: 15 May 2017

See all articles by Klaus Grobys

Klaus Grobys

University of Vaasa; University of Jyväskyla

Jari-Pekka Heinonen

University of Vaasa - Department of Accounting and Finance

Date Written: May 15, 2017

Abstract

This is the first paper to explore the effects of perceived corruption on the FX market. It finds that the currencies of countries perceived to suffer from high levels of corruption generate statistically significantly lower returns than the currencies of countries perceived to have low levels of corruption. Moreover, the portfolio spread is highly correlated with NBER recessions and U.S. consumption growth of nondurable goods. Interestingly, stochastic discount factor model analysis reveals that the portfolio spread is useful for pricing the cross section of currency returns, even when controlling for standard FX risk factors.

Keywords: Corruption, corruption perceptions, corruption risk, FX markets, currency markets

JEL Classification: G12, G14

Suggested Citation

Grobys, Klaus and Heinonen, Jari-Pekka, Corruption, Carry Trades, and the Cross Section of Currency Returns (May 15, 2017). Available at SSRN: https://ssrn.com/abstract=2961743 or http://dx.doi.org/10.2139/ssrn.2961743

Klaus Grobys (Contact Author)

University of Vaasa ( email )

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

University of Jyväskyla ( email )

Jyväskyla
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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