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What Do Stock Markets Tell Us about Exchange Rates?

Cenedese, G., Payne, R., Sarno, L. and Valente, G. (2016). What Do Stock Markets Tell Us about Exchange Rates?. Review of Finance, 20(3), pp. 1045-1080. doi: 10.1093/rof/rfv032

Abstract

The sign of the correlation between equity returns and exchange rate returns can be positive or negative in theory. Using data for a broad set of forty-two countries, we find that exchange rate movements are in fact unrelated to differentials in country-level equity returns. Consequently, a trading strategy that invests in countries with the highest expected equity returns and shorts those with the lowest generates substantial returns and Sharpe ratios. These returns partially reflect compensation for global equity volatility risk, but significant excess returns remain after controlling for exposure to standard risk factors.

Publication Type: Article
Additional Information: This is a pre-copyedited, author-produced PDF of an article accepted for publication in Review of Finance following peer review. The version of record Cenedese, G., Payne, R., Sarno, L. & Valente, G. What Do Stock Markets Tell Us about Exchange Rates?. Review of Finance, is available online at: http://dx.doi.org/10.1093/rof/rfv032.
Publisher Keywords: Empirical Asset Pricing, Exchange Rates, International Asset Allocation
Subjects: H Social Sciences > HG Finance
Departments: Cass Business School > Finance
URI: http://openaccess.city.ac.uk/id/eprint/13158
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