Housing Cycles and Exchange Rates

Fisher College of Business Working Paper No. 2019-03-014

Charles A. Dice Center Working Paper No. 2019-14

54 Pages Posted: 9 May 2019 Last revised: 7 Apr 2020

See all articles by Sai Ma

Sai Ma

Board of Governors of the Federal Reserve

Shaojun Zhang

The Ohio State University

Date Written: December 13, 2019

Abstract

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

Ma, Sai and Zhang, Shaojun, Housing Cycles and Exchange Rates (December 13, 2019). Fisher College of Business Working Paper No. 2019-03-014. Available at SSRN: https://ssrn.com/abstract=3384816 or http://dx.doi.org/10.2139/ssrn.3384816

Sai Ma

Board of Governors of the Federal Reserve ( email )

20th St. and Constitution Ave.
Washington, DC 20551
United States
202-452-2870 (Phone)

HOME PAGE: http://saimaecon.com

Shaojun Zhang (Contact Author)

The Ohio State University

2100 Neil Avenue
Columbus, OH 43210-1144
United States

HOME PAGE: http://sites.google.com/view/zhangshaojun

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