The Share of Systematic Variation in Bilateral Exchange Rates
Name
Manuscript_July2017_Main.pdf
Description
Accepted version
Size
286.56 KB
Format
Adobe PDF
Checksum (MD5)
921d1e0fd9078203631a662cfc77237b
Author(s)
Verdelhan, Adrien Frederic
Date Issued
November 2017
Journal
Journal of Finance
Publisher
Wiley
Citation
Verdelhan, Adrien et al. "The Share of Systematic Variation in Bilateral Exchange Rates." Journal of Finance 73, 1 (February 2018): 375-418 © 2017 American Finance Association
Version
Author's final manuscript
Abstract
Sorting countries by their dollar currency betas produces a novel cross section of average currency excess returns. A slope factor (long in high beta currencies and short in low beta currencies) accounts for this cross section of currency risk premia. This slope factor is orthogonal to the high‐minus‐low carry trade factor built from portfolios of countries sorted by their interest rates. The two high‐minus‐low risk factors account for 18% to 80% of the monthly exchange rate movements. The two risk factors suggest that stochastic discount factors in complete markets' models should feature at least two global shocks to describe exchange rates.
MIT Department
Sloan School of Management
Terms of Use
Creative Commons Attribution-Noncommercial-Share Alike
Persistent DSpace Link
DOI of Published Version
https://doi.org/10.1111/jofi.12587
