Post by Sapphire Capital on Aug 9, 2008 1:29:52 GMT 4
Does Business Cycle Risk Account for Systematic Returns from Currency Positioning? The International Perspective
Roberto A. De Santis
European Central Bank (ECB) - Directorate General Economics
Fabio Fornari
European Central Bank (ECB)
June 3, 2008
Abstract:
Low-yielding currencies (relative to dollar interest rate and based on annual data) represent a strong hedging tool for a US investor in the event of a slowdown of the US economy, as shown in Lustig and Verdelhan (2007). In this paper we show that such a conclusion is far more general, holding jointly for representative agents in a number of countries (Australia, Canada, France, United Kingdom and United States) and for quarterly holding period returns, which are closer to the frequency at which portfolios are re-balanced. The prices of risk for nondurable and durable consumption growth explain the cross-sectional variation of average currency portfolio returns, as confirmed by high Rý coefficients. However, statistical significance of the coefficients, checked both individually and joint, does not exceed 10%. Overall, taking an economic standpoint, holding currencies that pay out low interest rates provides some means of insurance against economic slowdown in the domestic economy.
papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1140663_code495651.pdf?abstractid=1140663&mirid=2
Roberto A. De Santis
European Central Bank (ECB) - Directorate General Economics
Fabio Fornari
European Central Bank (ECB)
June 3, 2008
Abstract:
Low-yielding currencies (relative to dollar interest rate and based on annual data) represent a strong hedging tool for a US investor in the event of a slowdown of the US economy, as shown in Lustig and Verdelhan (2007). In this paper we show that such a conclusion is far more general, holding jointly for representative agents in a number of countries (Australia, Canada, France, United Kingdom and United States) and for quarterly holding period returns, which are closer to the frequency at which portfolios are re-balanced. The prices of risk for nondurable and durable consumption growth explain the cross-sectional variation of average currency portfolio returns, as confirmed by high Rý coefficients. However, statistical significance of the coefficients, checked both individually and joint, does not exceed 10%. Overall, taking an economic standpoint, holding currencies that pay out low interest rates provides some means of insurance against economic slowdown in the domestic economy.
papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1140663_code495651.pdf?abstractid=1140663&mirid=2