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Unemployment fluctuations and the predictability of currency returns

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  • Nucera, Federico

Abstract

We investigate whether unemployment fluctuations generate predictability in the cross-section of currency excess returns. We find that currencies with lower growth in the unemployment rate appreciate while currencies with higher growth in the unemployment rate depreciate. As a result, an investment strategy that involves investing in the former and short selling of the latter produces positive and sizable excess returns. Asset pricing tests show that the predictability is not driven by exposure to traditional risk factors such as global equity risk, global foreign exchange volatility risk, and downside risk but is related instead to an idiosyncratic unemployment risk.

Suggested Citation

  • Nucera, Federico, 2017. "Unemployment fluctuations and the predictability of currency returns," Journal of Banking & Finance, Elsevier, vol. 84(C), pages 88-106.
    • Handle: RePEc:eee:jbfina:v:84:y:2017:i:c:p:88-106
    DOI: 10.1016/j.jbankfin.2017.07.007
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    More about this item

    Keywords

    Currency portfolio returns; Unemployment fluctuations; Predictability; Risk-premia; Asset pricing;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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