Housing Cycles and Exchange Rates
Charles A. Dice Center Working Paper No. 2019-14
54 Pages Posted: 9 May 2019 Last revised: 7 Apr 2020
Date Written: December 13, 2019
This paper documents that the housing cycle, measured by the residential investment share, is a strong in-sample and out-of-sample predictor for the dollar up to twelve quarters. Housing construction is negatively associated with risk premia in equity and bonds, but positively with foreign currency premia. We study a model with external habit preferences over tradable nonhousing consumption only, which implies counter-cyclical SDF volatility and procyclical demand for nontradable housing consumption. The predictability for excess returns in foreign currencies and other assets arises endogenously. The currency predictability is robust to a host of additional checks and holds for other G10 currencies.
Keywords: housing, exchange rate, predictability
JEL Classification: F31, F37, G150, G17
Suggested Citation: Suggested Citation