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Business Cycles and Currency Returns

Author

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  • Colacito, Ric
  • Riddiough, Steven
  • Sarno, Lucio

Abstract

We find a strong link between currency excess returns and the relative strength of the business cycle. Buying currencies of strong economies and selling currencies of weak economies generates high returns both in the cross section and time series of countries. These returns stem primarily from spot exchange rate predictability, are uncorrelated with common currency investment strategies, and cannot be understood using traditional currency risk factors in either unconditional or conditional asset pricing tests. We also show that a business cycle factor implied by our results is priced in a broad currency cross section.

Suggested Citation

  • Colacito, Ric & Riddiough, Steven & Sarno, Lucio, 2019. "Business Cycles and Currency Returns," CEPR Discussion Papers 14015, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:14015
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    References listed on IDEAS

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    Keywords

    business cycles; currency risk premium; Exchange Rates; Long-run risk;

    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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