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Currency excess returns and global downside market risk

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  • Atanasov, Victoria
  • Nitschka, Thomas

Abstract

We assess cross-sectional differences in 23 bilateral currency excess returns in an empirical model that distinguishes between US-specific and global risks, conditional on US bull (upside) or bear (downside) markets. Using the US dollar as numeraire currency, our results suggest that global downside risk is compensated in conditional and unconditional, bilateral currency excess returns. This finding is mostly driven by the emerging markets' currencies in our sample. We also find that the link between the global downside risk and risks associated with a typical carry trade strategy is much weaker for emerging markets' currencies than for developed markets' currencies.

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  • 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.
    • Handle: RePEc:eee:jimfin:v:47:y:2014:i:c:p:268-285
    DOI: 10.1016/j.jimonfin.2014.06.006
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    More about this item

    Keywords

    CAPM; Downside risk; Exchange rate; Forward premium puzzle; Uncovered interest rate parity; Upside risk;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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