The Cross-Section of Currency Appreciation Rates

41 Pages Posted: 30 Apr 2019

See all articles by Paulo F. Maio

Paulo F. Maio

Hanken School of Economics - Department of Finance and Statistics

Pedro Barroso

CATÓLICA-LISBON School of Business & Economics

Date Written: April 12, 2019

Abstract

We compute a cross-sectional variance decomposition for the average appreciation rate of foreign currencies. The cross-sectional dispersion in average nominal exchange rate growth is due to predictability of interest rate spreads among non-G10 currencies. However, among G10 currencies, we have an opposite pattern with cross-sectional return predictability playing the dominant role. The importance of the return channel among the G10 currencies is even stronger for real appreciation rates. By decomposing the cross-sectional return channel, pricing errors outweigh currency risk premia in terms of explaining nominal currency appreciation among G10 currencies. These results suggest important differences between G10 and other currencies.

Keywords: exchange rates, currency returns, currency risk premia, interest rate differentials, variance decomposition, carry trade, linear factor models, currency factors

JEL Classification: F31, G12, G15

Suggested Citation

Maio, Paulo F. and Barroso, Pedro, The Cross-Section of Currency Appreciation Rates (April 12, 2019). Available at SSRN: https://ssrn.com/abstract=3371115 or http://dx.doi.org/10.2139/ssrn.3371115

Paulo F. Maio (Contact Author)

Hanken School of Economics - Department of Finance and Statistics ( email )

FI-00101 Helsinki
Finland

HOME PAGE: http://sites.google.com/site/paulofmaio/home

Pedro Barroso

CATÓLICA-LISBON School of Business & Economics ( email )

Palma de Cima
Lisbon, Lisboa 1649-023
Portugal

HOME PAGE: http://https://clsbe.lisboa.ucp.pt/person/pedro-monteiro-e-silva-barroso

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