Faculty of Economics and Business Administration Publications Database

Currency Value

Menkhoff, Lukas
Sarno, Lucio
Schrimpf, Andreas
Volume: 30
Number: 2
Pages: 416 - 441
ISSN-Print: 0893-9454
Link External Source: Online Version
Year: 2017
Keywords: Currency value, macro fundamentals, real exchange rate, predictability

We assess the properties of currency value strategies based on real exchange rates. We find that real exchange rates have predictive power for the cross-section of currency excess returns. However, adjusting real exchange rates for key country-specific fundamentals (productivity, the quality of export goods, net foreign assets, and output gaps) better isolates information related to the currency risk premium. In turn, the resultant measure of currency value displays considerably stronger predictive power for currency excess returns. Finally, the predictive information content in our currency value measure is distinct from that embedded in popular currency strategies, such as carry and momentum.