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Country Fundamentals and Currency Excess Returns

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  • Kim, Daehwan

    (Konkuk University)

  • Song, Chi-Young

    (Kookmin University)

Abstract

We examine whether country fundamentals help explain the cross-section of currency excess returns. For this purpose, we consider fundamental variables such as default risk, foreign exchange rate regime, capital control as well as interest rate in the multi-factor model framework. Our empirical results show that fundamental factors explain a large part of the cross-section of currency excess returns. The zero-intercept restriction of the factor model is not rejected for most currencies. They also reveal that our factor model with country fundamentals performs better than a factor model with usual investment-style factors. Our main empirical results are based on 2001-2010 balanced panel data of 19 major currencies. This paper may fill the gap between country fundamentals and practitioners' strategies on currency investment.

Suggested Citation

  • Kim, Daehwan & Song, Chi-Young, 2014. "Country Fundamentals and Currency Excess Returns," East Asian Economic Review, Korea Institute for International Economic Policy, vol. 18(2), pages 111-142, June.
    • Handle: RePEc:ris:eaerev:0041
    DOI: 10.11644/KIEP.JEAI.2014.18.2.277
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    More about this item

    Keywords

    Currency Excess Returns; Country Fundamentals; Factor Model; Fundamental Factors; Investment-style Factors;
    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
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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