DP15054 U.S. Populist Rhetoric and Currency Returns
|Author(s):||Ilias Filippou, Arie Gozluklu, My Nguyen, Mark Taylor|
|Publication Date:||July 2020|
|Keyword(s):||Foreign exchange market, populism, textual analysis|
|JEL(s):||G11, G12, G14, G32|
|Programme Areas:||International Macroeconomics and Finance|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=15054|
We develop a novel measure of U.S. populist rhetoric. Aggregate Populist Rhetoric (APR) Index spikes around populist events. We decompose the APR Index into sub-indices. We show that APR Index and International Relations sub-index are negatively priced in the cross-section of currency excess returns. Currencies that perform well (badly) when U.S. populist rhetoric is high yield low (high) expected excess returns. Investors require high risk premium for holding currencies which underperform in times of rising U.S. populist rhetoric, especially in the post-crisis period. A long-short strategy that buys (sells) currencies with high (low) exposure to U.S. populism offers strong diversification benefits.