Review of Financial Studies Vol. 30 No. 2 2017

Currency Value

Lukas Menkhoff¹; Lucio Sarno^1,2,3; Maik Schmeling²; Andreas Schrimpf⁴

¹ German Institute for Economic Research · ² City, University of London · ³ Centre for Economic Policy Research · ⁴ Bank for International Settlements

Abstract

We assess the properties of currency value strategies based on real exchange rates. We find that real exchange rates have predictive power for the cross-section of currency excess returns. However, adjusting real exchange rates for key country-specific fundamentals (productivity, the quality of export goods, net foreign assets, and output gaps) better isolates information related to the currency risk premium. In turn, the resultant measure of currency value displays considerably stronger predictive power for currency excess returns. Finally, the predictive information content in our currency value measure is distinct from that embedded in popular currency strategies, such as carry and momentum.

DOI

10.1093/rfs/hhw067

Volume

30

Issue

2

Pages

416-441

Language

en

Sources

bibtex:phds-export.bib openalex crossref

Cite

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