nep-ifn New Economics Papers
on International Finance
Issue of 2013‒07‒20
one paper chosen by
Vimal Balasubramaniam
University of Oxford

  1. Currency excess returns and global downside market risk By Victoria Galsband; Thomas Nitschka

  1. By: Victoria Galsband; Thomas Nitschka
    Abstract: We take the perspective of a US investor to assess cross-sectional differences in 19 bilateral, conditional currency excess returns in an empirical model that distinguishes between US-specific and global risks, conditional on US bull (upside) or bear (downside) markets. At first glance, our results suggest that global downside risk is compensated in average bilateral currency excess returns. Further analysis, however, reveals that downside risk and financial market volatility exposures are closely related. Moreover, the downside risk evidence is mostly driven by emerging markets' currencies. We conclude that downside risk models do not fully address the issue of foreign currency excess returns being largely unrelated to standard risk factors.
    Keywords: CAPM, downside risk, exchange rate, forward premium puzzle, uncoveredinterest rate parity, upside risk
    JEL: F31 G15
    Date: 2013

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