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Emerging Market Currency Excess Returns

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  • Stephen Gilmore
  • Fumio Hayashi

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)

Suggested Citation

  • Stephen Gilmore & Fumio Hayashi, 2011. "Emerging Market Currency Excess Returns," American Economic Journal: Macroeconomics, American Economic Association, vol. 3(4), pages 85-111, October.
    • Handle: RePEc:aea:aejmac:v:3:y:2011:i:4:p:85-111
    Note: DOI: 10.1257/mac.3.4.85
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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