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Attractive and non-attractive currencies

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  • Dupuy, Philippe
  • James, Jessica
  • Marsh, Ian W.

Abstract

In the foreign exchange market, time-varying transaction costs and interest rates may define the time-varying set of attractive currencies for investors. Our study shows that when the currencies are attractive, they tend to deviate from the uncovered interest rate parity and to comove with the global stochastic discount factor (SDF). Inversely, when they are non-attractive, currencies tend to conform more closely to uncovered interest parity and do not comove with the global SDF. As a consequence, both investors and policy makers may want to know the status of a currency as it conveys important information about the future return of the currency. We illustrate our point in a sample including 26 currencies over the period 1985--2017.

Suggested Citation

  • Dupuy, Philippe & James, Jessica & Marsh, Ian W., 2021. "Attractive and non-attractive currencies," Journal of International Money and Finance, Elsevier, vol. 110(C).
  • Handle: RePEc:eee:jimfin:v:110:y:2021:i:c:s0261560620302096
    DOI: 10.1016/j.jimonfin.2020.102253
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    Cited by:

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    2. Bruno Thiago Tomio & Guillaume Vallet, 2021. "Carry Trade and Negative Policy Rates in Switzerland : Low-lying fog or storm ?," Post-Print halshs-03669561, HAL.
    3. Fehmi Özsoy & Nükhet Doðan, 2022. "Deterministic Effects of Volatility on Mixed Frequency GARCH in Means MIDAS Model: Evidence from Turkey," International Econometric Review (IER), Econometric Research Association, vol. 14(1), pages 1-20, March.

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    More about this item

    Keywords

    Exchange rate; Carry trade; Bid-ask spread; Risk premium;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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