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Foreign currency returns and systematic risks

Author

Listed:
  • Victoria Galsband
  • Dr. Thomas Nitschka

Abstract

The decomposition of the market return into its cash-flow and discount-rate news driven components reveals that excess returns on low forward discount currency portfolios load positively on "good" news about the stock market's discount rates while high forward discount currencies load negatively on this news. Average currency portfolio returns are hence explained by different sensitivities to discount-rate news. A two-beta version of the CAPM, distinguishing between cash-flow and discount-rate betas, is able to price both currency and stock portfolio returns at the same time. Finally, we find that the relation between stock market news and foreign currency returns varies across the two either discount-rate news or both discount-rate and cash-flow news driven stock market booms of the past two decades.

Suggested Citation

  • Victoria Galsband & Dr. Thomas Nitschka, 2011. "Foreign currency returns and systematic risks," Working Papers 2011-03, Swiss National Bank.
    • Handle: RePEc:snb:snbwpa:2011-03
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    File URL: https://www.snb.ch/en/publications/research/working-papers/2011/working_paper_2011_03
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    Citations

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    Cited by:

    1. Ballotta, Laura & Deelstra, Griselda & Rayée, Grégory, 2017. "Multivariate FX models with jumps: Triangles, Quantos and implied correlation," European Journal of Operational Research, Elsevier, vol. 260(3), pages 1181-1199.
    2. Dr. Thomas Nitschka, 2014. "The Good? The Bad? The Ugly? Which news drive (co)variation in Swiss and US bond and stock excess returns?," Working Papers 2014-01, Swiss National Bank.
    3. Thomas Nitschka, 2014. "What News Drive Variation in Swiss and US Bond and Stock Excess Returns?," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 150(II), pages 89-118, June.
    4. Adrien Verdelhan, 2018. "The Share of Systematic Variation in Bilateral Exchange Rates," Journal of Finance, American Finance Association, vol. 73(1), pages 375-418, February.
    5. Sakemoto, Ryuta, 2019. "Currency carry trades and the conditional factor model," International Review of Financial Analysis, Elsevier, vol. 63(C), pages 198-208.
    6. Giovanni Calice & Ming Zeng, 2021. "The term structure of sovereign credit default swap and the cross‐section of exchange rate predictability," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(1), pages 445-458, January.
    7. Danau, Daniel, 2020. "Prudence and preference for flexibility gain," European Journal of Operational Research, Elsevier, vol. 287(2), pages 776-785.
    8. Atanasov, Victoria & Nitschka, Thomas, 2014. "Currency excess returns and global downside market risk," Journal of International Money and Finance, Elsevier, vol. 47(C), pages 268-285.
    9. Polsitty R. Kumar & Giuseppe T. Cirella, 2020. "Globalization – Reflective Outlook," Journal of Applied Management and Investments, Department of Business Administration and Corporate Security, International Humanitarian University, vol. 9(1), pages 42-50, March.
    10. Mohammadreza Tavakoli Baghdadabad & Girijasankar Mallik, 2021. "Market news co-moments and currency returns," Empirical Economics, Springer, vol. 61(4), pages 1819-1863, October.
    11. Byrne, Joseph P. & Ibrahim, Boulis Maher & Sakemoto, Ryuta, 2019. "Carry trades and commodity risk factors," Journal of International Money and Finance, Elsevier, vol. 96(C), pages 121-129.
    12. Laura Ballota & Griselda Deelstra & Grégory Rayée, 2015. "Quanto Implied Correlation in a Multi-Lévy Framework," Working Papers ECARES ECARES 2015-36, ULB -- Universite Libre de Bruxelles.
    13. Tan T. M. Le & Franck Martin & Duc K. Nguyen, 2018. "Dynamic connectedness of global currencies: a conditional Granger-causality approach," Economics Working Paper Archive (University of Rennes 1 & University of Caen) 2018-04, Center for Research in Economics and Management (CREM), University of Rennes 1, University of Caen and CNRS.

    More about this item

    Keywords

    Currency returns; cash-flow news; discount-rate news; market return; UIP;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation: Models and Applications
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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