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Journal of Finance Vol. 72 No. 3 2017

Exchange Rates and Monetary Policy Uncertainty

Philippe Mueller1; Alireza Tahbaz-Salehi; Andrea Vedolin2,3,1

1 London School of Economics and Political Science · 2 Faculdades Guarulhos · 3 University College London

open access

Abstract

We document that a trading strategy that is short the U.S. dollar and long other currencies exhibits significantly larger excess returns on days with scheduled Federal Open Market Committee (FOMC) announcements. We show that these excess returns (i) are higher for currencies with higher interest rate differentials vis‐à‐vis the United States, (ii) increase with uncertainty about monetary policy, and (iii) increase further when the Federal Reserve adopts a policy of monetary easing. We interpret these excess returns as compensation for monetary policy uncertainty within a parsimonious model of constrained financiers who intermediate global demand for currencies.

DOI
10.1111/jofi.12499
Volume
72
Issue
3
Pages
1213-1252
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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