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Currency value
Authors
L Menkhoff
L Sarno
M Schmeling
A Schrimpf
Publication date
9 August 2016
Publisher
The Review of Financial Studies
Doi
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Abstract
© The Author 2016. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. 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
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Last time updated on 13/01/2020
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Last time updated on 02/08/2016