Current Account Uncertainty and Currency Premia
81 Pages Posted: 1 Mar 2017 Last revised: 7 Oct 2022
Date Written: June 8, 2022
Abstract
We empirically study the relationship between currency excess returns and current account uncertainty, measured as forecast dispersion. We find that investment currencies deliver low returns, whereas funding currencies offer a hedge when current account uncertainty is unexpectedly high. Moreover, an increase in current account uncertainty is associated with higher expected future excess returns on investment currencies. This mechanism is consistent with the recent advances in exchange rate theory based on capital flows in imperfect financial markets.
Keywords: analyst forecasts, carry trade, currency risk premium, global imbalances, macro uncertainty,
JEL Classification: F14, F31, F32, F34, G12, G15.
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