DP11324 Currency Value
|Author(s):||Lukas Menkhoff, Lucio Sarno, Maik Schmeling, Andreas Schrimpf|
|Publication Date:||June 2016|
|Keyword(s):||Currency value, macro fundamentals, predictability, real exchange rate|
|JEL(s):||F31, G12, G15|
|Programme Areas:||Financial Economics, International Macroeconomics and Finance|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=11324|
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.