Country Fundamentals and Currency Excess Returns
We examine whether country fundamentals help explain the cross-section of currency excess returns. For this purpose, we consider fundamental variables such as default risk, foreign exchange rate regime, capital control as well as interest rate in the multi-factor model framework. Our empirical resul...
Main Authors: | , |
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Format: | Article |
Language: | English |
Published: |
Korea Institute for International Economic Policy
2014-06-01
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Series: | East Asian Economic Review |
Subjects: | |
Online Access: | http://dx.doi.org/10.11644/KIEP.JEAI.2014.18.2.277 |
Summary: | We examine whether country fundamentals help explain the cross-section of currency excess returns. For this purpose, we consider fundamental variables such as default risk, foreign exchange rate regime, capital control as well as interest rate in the multi-factor model framework. Our empirical results show that fundamental factors explain a large part of the cross-section of currency excess returns. The zero-intercept restriction of the factor model is not rejected for most currencies. They also reveal that our factor model with country fundamentals performs better than a factor model with usual investment-style factors. Our main empirical results are based on 2001-2010 balanced panel data of 19 major currencies. This paper may fill the gap between country fundamentals and practitioners' strategies on currency investment. |
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ISSN: | 2508-1640 2508-1667 |