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.