The Share of Systematic Variation in Bilateral Exchange Rates
By A. Verdelhan. 2018
238 citations recorded by the source corpus.
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.
Subfields: Economics and Econometrics, Finance
View Paper: https://www.semanticscholar.org/paper/7e8eb9a2a5b6e7feb4bb218df5b135b2c03169ff
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Citations in the corpus
- Central Bank Digital Currency in an Open Economy (2020, methodology): “…not accounted for by changes in bond yields – should become larger.25 One way to test that prediction is to estimate a standard UIP equation similar to Verdelhan (2018) on simulated data: et+k − et = αk + βk [rt − r∗t ] + εt+k (4.1) where et is the log of the exchange rate and rt − r∗t is the…”