Exchange Rates and International Capital Market
Saturday, Jan. 6, 2018 10:15 AM - 12:15 PM
- Chair: Vivian Yue, Emory University
Business Cycles and Currency Returns
AbstractWe find a strong link between currency returns and the relative strength of the business cycle. Buying currencies of strong economies and selling currencies of weak economies generates high returns in both the cross-section and time-series of countries. These returns stem primarily from spot exchange rate predictability, are uncorrelated with common currency strategies, and cannot be understood using traditional risk factors. We also show that a business cycle factor implied by our results is priced in a broad cross-section of currency excess returns. These results contrast with a vast literature that detects no linkages between currency fluctuations and macroeconomic variables.
The Volatility of International Capital Flows and Foreign Assets
AbstractThis paper presents a two-good, two-country real model that replicates the basic stylized facts on equity excess returns and real interest rates. In the model, markets are incomplete. In each country, workers cannot participate in financial markets whereas investors trade domestic and foreign stocks, as well as an international bond. The investors’ asset positions are subject to a borrowing constraint, along with a short-selling constraint on equity. Foreign and domestic agents differ in their elasticity of inter
temporal substitution and in their risk-aversion. A time-varying probability of a global disaster implies time-varying risk premia in asset markets, and therefore large and time-varying expected valuation effects on international asset positions. The model highlights the role of market incompleteness and heterogeneity across countries in accounting for the volatility of equity and debt international capital flows.
Gravity in FX R2: Understanding the Factor Structure in Exchange Rates
AbstractWe relate the risk characteristics of currencies to country characteristics. Exchange rates strongly co-vary against their base currency. We show that exposure to this common covariation is increasing in the distance of a country from the base country. For example, the base currency beta of the CHF/USD exchange rate on the dollar factor is determined by the distance between Switzerland and the United States. Shared language, legal origin, a shared border, resource similarity and colonial linkages significantly lower the bilateral exchange rate betas.
- G1 - General Financial Markets