Abstract

In the foreign exchange market, time-varying transaction costs and interest rates may define the time-varying set of attractive currencies for investors. Our study shows that when the currencies are attractive, they tend to deviate from the uncovered interest rate parity and to comove with the global stochastic discount factor (SDF). Inversely, when they are non-attractive, currencies tend to conform more closely to uncovered interest parity and do not comove with the global SDF. As a consequence, both investors and policy makers may want to know the status of a currency as it conveys important information about the future return of the currency. We illustrate our point in a sample including 26 currencies over the period 1985-2017.

Publication Type:	Article
Additional Information:	© 2020. 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 Rate, Carry trade, bid-ask spread, Risk premium
Subjects:	H Social Sciences > HG Finance H Social Sciences > HJ Public Finance
Departments:	Business School > Finance
Date Deposited:	24 Aug 2020 10:14
URI:	https://openaccess.city.ac.uk/id/eprint/24794

Text - Accepted Version This document is not freely accessible until 8 March 2022 due to copyright restrictions. Available under License Creative Commons Attribution Non-commercial No Derivatives. To request a copy, please use the button below. Request a copy

Export

Downloads