Discussion paper

DP14015 Business Cycles and Currency Returns

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.


Sarno, L, R Colacito and S Riddiough (2019), ‘DP14015 Business Cycles and Currency Returns‘, CEPR Discussion Paper No. 14015. CEPR Press, Paris & London. https://cepr.org/publications/dp14015