Business cycles and currency returns

Riccardo Colacito; Steven Riddiough; Lucio Sarno

doi:10.1016/j.jfineco.2020.04.005

Journal of Financial Economics Vol. 137 No. 3 2020

Business cycles and currency returns

Riccardo Colacito^1,2; Steven Riddiough³; Lucio Sarno^4,5

¹ National Bureau of Economic Research · ² University of North Carolina at Chapel Hill · ³ The University of Melbourne · ⁴ University of Cambridge · ⁵ Centre for Economic Policy Research

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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.

DOI: 10.1016/j.jfineco.2020.04.005
Volume: 137
Issue: 3
Pages: 659-678
Language: en
Sources: crossref bibtex:phds-export.bib openalex

Business cycles and currency returns

Abstract

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