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Currency Exposure to Downside Risk: Which Fundamentals Matter?

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  • Victoria Dobrynskaya

Abstract

I study whether or not countries' macroeconomic characteristics are systematically related to their currencies' exposure to the downside market risk. I find that the currency downside risk is strongly associated with the local inflation rate, real interest rate and net foreign asset position. Currencies of countries with high inflation and real interest rates and negative net foreign asset position (debtor countries) are more exposed to the downside risk whereas currencies of countries with low inflation and real interest rates and positive net foreign asset position (creditor countries) exhibit “safe haven” properties. The local real interest rate has the highest explanatory power in accounting for the cross-section of currency exposure to the downside risk. This suggests that the high currency exposure to the downside risk is a consequence of investments in high-yield risky countries and flight from them in “hard times”.

Suggested Citation

  • Victoria Dobrynskaya, 2015. "Currency Exposure to Downside Risk: Which Fundamentals Matter?," Review of International Economics, Wiley Blackwell, vol. 23(2), pages 345-360, May.
  • Handle: RePEc:bla:reviec:v:23:y:2015:i:2:p:345-360
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    File URL: http://hdl.handle.net/10.1111/roie.12174
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    References listed on IDEAS

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    1. Tarek A. Hassan, 2013. "Country Size, Currency Unions, and International Asset Returns," Journal of Finance, American Finance Association, vol. 68(6), pages 2269-2308, December.
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    8. Victoria Dobrynskaya, 2014. "Downside Market Risk of Carry Trades," Review of Finance, European Finance Association, vol. 18(5), pages 1885-1913.
    9. Atanasov, Victoria & Nitschka, Thomas, 2014. "Currency excess returns and global downside market risk," Journal of International Money and Finance, Elsevier, vol. 47(C), pages 268-285.
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    Cited by:

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    2. Thomas A. Maurer & Thuy-Duong Tô & Ngoc-Khanh Tran, 2019. "Pricing Risks Across Currency Denominations," Management Science, INFORMS, vol. 65(11), pages 5308-5336, November.

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