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Currency Value

Diskussionspapiere extern

Lukas Menkhoff, Lucio Sarno, Maik Schmeling, Andreas Schrimpf

London: CEPR, 2016, 51 S.
(Discussion Paper Series / Centre for Economic Policy Research ; 11324)

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 resulting 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.

Lukas Menkhoff

Head of Department in the International Economics Department



JEL-Classification: F31;G12
Keywords: Currency value, macro fundamentals, predictability, real exchange rate
Externer Link:
http://www.cepr.org/active/publications/discussion_papers/dp.php?dpno=11324

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