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FX Comovements and Their Economic Determinants

Author

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  • Jose Gonzalo Rangel

Abstract

This article models high- and low-frequency dynamic components of FX excess return correlations and examines their relationship with economic fundamentals. A factor pricing model with time-varying betas is used to characterize these correlations. From the low-frequency components, an aggregate comovement measure is derived. This component is countercyclical relative to the U.S., as it is negatively related to economic growth and positively related to both inflation volatility and economic policy uncertainty. Idiosyncratic volatilities also drive currency comovements. I examine their cross-sectional variation and find significant impacts of inflation levels, monetary policy variables, real output growth, trade, and capital flows.

Suggested Citation

  • Jose Gonzalo Rangel, 2025. "FX Comovements and Their Economic Determinants," Journal of Financial Econometrics, Oxford University Press, vol. 23(3), pages 4042-4064.
    • Handle: RePEc:oup:jfinec:v:23:y:2025:i:3:p:4042-4064.
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    File URL: http://hdl.handle.net/10.1093/jjfinec/nbae031
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    More about this item

    Keywords

    Conditional currency comovements; currency factors; time-varying loadings; idiosyncratic volatilities; trends; economic fundamentals;
    All these keywords.

    JEL classification:

    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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