← Search

Review of Finance Vol. 20 No. 3 2016

What Do Stock Markets Tell Us about Exchange Rates?

Gino Cenedese1; Richard Payne2; Lucio Sarno2; Giorgio Valente3

1 1 Bank of England, · 2 2 Cass Business School, City University London, and · 3 3 City University of Hong Kong

open access

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.

DOI
10.1093/rof/rfv032
Volume
20
Issue
3
Pages
1045-1080
Language
en
Sources
bibtex:phds-export.bib openalex crossref

Cite