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Discussion Paper Details

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Title: Currency Value

Author(s): Lukas Menkhoff, Lucio Sarno, Maik Schmeling and Andreas Schrimpf

Publication Date: June 2016

Keyword(s): Currency value, macro fundamentals, predictability and real exchange rate

Programme Area(s): Financial Economics and International Macroeconomics and Finance

Abstract: 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 resulting 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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Bibliographic Reference

Menkhoff, L, Sarno, L, Schmeling, M and Schrimpf, A. 2016. 'Currency Value'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=11324