Cross-Border M&A and Currency Returns
50 Pages Posted: 2 Nov 2020 Last revised: 14 Nov 2020
Date Written: October 9, 2020
We uncover a novel source of currency return predictability stemming from cross-border merger and acquisition (M&A) activity: abnormally large M&A inflows lead exchange rate appreciations, while depreciations follow unusually large M&A outflows. We show that a simple cross-sectional currency strategy exploiting this predictability generates a Sharpe ratio of over 0.70 and is orthogonal to existing currency strategies. The portfolio weights are found to coincide with local extremes in macroeconomic fundamentals: countries experiencing the largest abnormal M&A outflows are growing most above their economic growth trend - a pattern that reverses following portfolio formation - while the opposite reversal in macroeconomic fundamentals is observed in countries experiencing unusually large M&A inflows.
Keywords: currency returns, cross-border mergers and acquisitions, macroeconomic growth
JEL Classification: F31, G12, G15
Suggested Citation: Suggested Citation