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Currency Value

Author

Listed:
  • Lukas Menkhoff
  • Lucio Sarno
  • Maik Schmeling
  • Andreas Schrimpf

Abstract

We assess the properties of currency value strategies based on real exchange rates. We find that real exchange rates have predictive power for the cross-section of currency excess returns. However, adjusting real exchange rates for key country-specific fundamentals (productivity, the quality of export goods, net foreign assets, and output gaps) better isolates information related to the currency risk premium. In turn, the resultant measure of currency value displays considerably stronger predictive power for currency excess returns. Finally, the predictive information content in our currency value measure is distinct from that embedded in popular currency strategies, such as carry and momentum.Received June 26, 2015; accepted June 8, 2016 by Editor Stefan Nagel.

Suggested Citation

  • Lukas Menkhoff & Lucio Sarno & Maik Schmeling & Andreas Schrimpf, 2017. "Currency Value," The Review of Financial Studies, Society for Financial Studies, vol. 30(2), pages 416-441.
    • Handle: RePEc:oup:rfinst:v:30:y:2017:i:2:p:416-441.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhw067
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    Cited by:

    1. Stijn Claessens & M. Ayhan Kose, 2017. "Asset Prices and Macroeconomic Outcomes: A Survey," CAMA Working Papers 2017-76, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    2. Nucera, Federico, 2017. "Unemployment fluctuations and the predictability of currency returns," Journal of Banking & Finance, Elsevier, vol. 84(C), pages 88-106.

    More about this item

    JEL classification:

    • 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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