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American Economic Journal: Macroeconomics: Vol. 3 No. 4 (October 2011)

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Emerging Market Currency Excess Returns

Article Citation

Gilmore, Stephen, and Fumio Hayashi. 2011. "Emerging Market Currency Excess Returns." American Economic Journal: Macroeconomics, 3(4): 85-111.

DOI: 10.1257/mac.3.4.85

Abstract

We consider the excess return from 20 internationally tradable emerging market (EM) currencies against the US dollar. It has two contributions. First, we document stylized facts about EM currencies. EM currencies have provided significant equity-like excess returns against major currencies, but with low volatility. Picking EM currencies with a relatively high forward premium raises the portfolio return substantially. Second, our calculation incorporates institutional features of the foreign exchange market, such as lags in settling spot contracts, FX swaps, and bid/offer spreads. Transaction costs arising from bid/offer spreads are less than one-fifth of what is typically presumed in the literature. (JEL C58, F31, G15)

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Authors

Gilmore, Stephen (Future Fund, Melbourne)
Hayashi, Fumio (Hitotsubashi U)

JEL Classifications

C58: Financial Econometrics
F31: Foreign Exchange
G15: International Financial Markets

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