The Economics of Currency Risk

37 Pages Posted: 3 Nov 2020

See all articles by Tarek Alexander Hassan

Tarek Alexander Hassan

Boston University

Tony Zhang

Board of Governors of the Federal Reserve System

Multiple version iconThere are 2 versions of this paper

Date Written: September 2020

Abstract

This article reviews the literature on currency and country risk with a focus on its macroeconomic origins and implications. A growing body of evidence shows countries with safer currencies enjoy persistently lower interest rates and a lower required return to capital. As a result, they accumulate relatively more capital than countries with currencies international investors perceive as risky. Whereas earlier research focused mainly on the role of currency risk in generating violations of uncovered interest parity and other financial anomalies, more recent evidence points to important implications for the allocation of capital across countries, the efficacy of exchange rate stabilization policies, the sustainability of trade deficits, and the spillovers of shocks across international borders.

Keywords: currency risk, country risk, capital flows, uncovered interest parity, carry trade, forward premium puzzle

Suggested Citation

Hassan, Tarek Alexander and Zhang, Tony, The Economics of Currency Risk (September 2020). Available at SSRN: https://ssrn.com/abstract=3692684 or http://dx.doi.org/10.2139/ssrn.3692684

Tarek Alexander Hassan (Contact Author)

Boston University ( email )

595 Commonwealth Avenue
Boston, MA 02215
United States

Tony Zhang

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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