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Title: Business Cycles and Currency Returns

Author(s): Ric Colacito, Steven Riddiough and Lucio Sarno

Publication Date: September 2019

Keyword(s): business cycles, currency risk premium, Exchange Rates and Long-run risk

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

Abstract: We find a strong link between currency excess returns and the relative strength of the business cycle. Buying currencies of strong economies and selling currencies of weak economies generates high returns both in the cross section and time series of countries. These returns stem primarily from spot exchange rate predictability, are uncorrelated with common currency investment strategies, and cannot be understood using traditional currency risk factors in either unconditional or conditional asset pricing tests. We also show that a business cycle factor implied by our results is priced in a broad currency cross section.

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Bibliographic Reference

Colacito, R, Riddiough, S and Sarno, L. 2019. 'Business Cycles and Currency Returns'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=14015