Do External Imbalances Matter in Explaining the Cross-Section of Currency Excess Returns?

64 Pages Posted: 27 Aug 2018 Last revised: 31 Dec 2018

See all articles by Pedro Barroso

Pedro Barroso

UNSW Australia Business School, School of Banking and Finance

Frickson Kho

UNSW Business School

Florent Rouxelin

University of New South Wales (UNSW)

Li Yang

UNSW Australia Business School, School of Banking and Finance; Financial Research Network (FIRN)

Date Written: August 15, 2018

Abstract

External imbalance is a central variable in international economics and recent research shows it is priced in currency portfolios. But Ang et al. (2017), among others, show that with a small and time-varying cross section, tests with individual assets are preferable. We find testing with individual currencies matters. Going down from portfolio level to individual currencies, the estimated risk premium of external imbalances changes from a statistically significant 3.4% per year to an (insignificant) return of the opposite sign. Its premium is totally subsumed by carry. This suggests new currency factors should be tested using both individual currencies and portfolios.

Keywords: External Imbalances, Financial Variables, Cross-Section of Currency Excess Returns, Portfolios Versus Individual Assets

JEL Classification: F31, F37, G12, G15

Suggested Citation

Barroso, Pedro and Kho, Frickson and Rouxelin, Florent and Yang, Li, Do External Imbalances Matter in Explaining the Cross-Section of Currency Excess Returns? (August 15, 2018). Available at SSRN: https://ssrn.com/abstract=3232396 or http://dx.doi.org/10.2139/ssrn.3232396

Pedro Barroso (Contact Author)

UNSW Australia Business School, School of Banking and Finance ( email )

Sydney, NSW 2052
Australia

Frickson Kho

UNSW Business School

UNSW Business School
High St
Sydney, NSW 2052
Australia

Florent Rouxelin

University of New South Wales (UNSW) ( email )

Kensington
High St
Sydney, NSW 2052
Australia

Li Yang

UNSW Australia Business School, School of Banking and Finance ( email )

Sydney, NSW 2052
Australia
+610293855857 (Phone)

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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