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Business Cycles and Currency Returns

Colacito, R., Riddiough, S. J. and Sarno, L. ORCID: 0000-0003-1279-9748 (2020). Business Cycles and Currency Returns. Journal of Financial Economics, 137(3), pp. 659-678. doi: 10.1016/j.jfineco.2020.04.005

Abstract

We find a strong link between currency excess returns and the relative strength of the business cycle. Buying currencies of strong economies and selling currencies of weak economies generates high returns both in the cross section and time series of countries. These returns stem primarily from spot exchange rate predictability, are uncorrelated with common currency investment strategies, and cannot be understood using traditional currency risk factors in either unconditional or conditional asset pricing tests. We also show that a business cycle factor implied by our results is priced in a broad currency cross section.

Publication Type: Article
Additional Information: © Elsevier 2019. This manuscript version is made available under the CC-BY-NC-ND 4.0 license http://creativecommons.org/licenses/by-nc-nd/4.0/
Publisher Keywords: exchange rates; currency risk premium; business cycles; long-run risk
Subjects: H Social Sciences > HG Finance
Departments: Bayes Business School > Finance
Date available in CRO: 20 Sep 2019 09:18
Date deposited: 20 September 2019
Date of acceptance: 19 September 2019
Date of first online publication: 4 May 2020
URI: https://openaccess.city.ac.uk/id/eprint/22867
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