The Share of Systematic Variation in Bilateral Exchange Rates
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‐minu...
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| Other Authors: | |
| Format: | Article |
| Language: | English |
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Wiley
2019
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| Online Access: | https://hdl.handle.net/1721.1/122354 |
| _version_ | 1826205518458257408 |
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| author | Verdelhan, Adrien Frederic |
| author2 | Sloan School of Management |
| author_facet | Sloan School of Management Verdelhan, Adrien Frederic |
| author_sort | Verdelhan, Adrien Frederic |
| collection | MIT |
| description | 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. |
| first_indexed | 2024-09-23T13:14:20Z |
| format | Article |
| id | mit-1721.1/122354 |
| institution | Massachusetts Institute of Technology |
| language | English |
| last_indexed | 2024-09-23T13:14:20Z |
| publishDate | 2019 |
| publisher | Wiley |
| record_format | dspace |
| spelling | mit-1721.1/1223542024-07-19T20:05:57Z The Share of Systematic Variation in Bilateral Exchange Rates Verdelhan, Adrien Frederic Sloan School of Management 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. 2019-10-03T14:30:12Z 2019-10-03T14:30:12Z 2017-11 2013-03 2019-09-27T11:24:31Z Article http://purl.org/eprint/type/JournalArticle 0022-1082 https://hdl.handle.net/1721.1/122354 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 en http://dx.doi.org/10.1111/jofi.12587 Journal of Finance Creative Commons Attribution-Noncommercial-Share Alike http://creativecommons.org/licenses/by-nc-sa/4.0/ application/pdf Wiley Prof. Verdelhan via Shikha Sharma |
| spellingShingle | Verdelhan, Adrien Frederic The Share of Systematic Variation in Bilateral Exchange Rates |
| title | The Share of Systematic Variation in Bilateral Exchange Rates |
| title_full | The Share of Systematic Variation in Bilateral Exchange Rates |
| title_fullStr | The Share of Systematic Variation in Bilateral Exchange Rates |
| title_full_unstemmed | The Share of Systematic Variation in Bilateral Exchange Rates |
| title_short | The Share of Systematic Variation in Bilateral Exchange Rates |
| title_sort | share of systematic variation in bilateral exchange rates |
| url | https://hdl.handle.net/1721.1/122354 |
| work_keys_str_mv | AT verdelhanadrienfrederic theshareofsystematicvariationinbilateralexchangerates AT verdelhanadrienfrederic shareofsystematicvariationinbilateralexchangerates |