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Currency Return Dynamics: What Is the Role of U.S. Macroeconomic Regimes? 

2023
  • 0
    Citations
  • 1,612
    Usage
  • 10
    Captures
  • 0
    Mentions
  • 0
    Social Media
Metric Options:   Counts1 Year3 Year

Metrics Details

  • Usage
    1,612
    • Abstract Views
      1,186
    • Downloads
      426
  • Captures
    10
    • Readers
      10
      • SSRN
        10
  • Ratings
    • Download Rank
      142,564

Paper Description

This paper investigates the time-varying impact of U.S. macroeconomic regimes on the risk factors driving currency return dynamics. We introduce a novel regime-switching model that endogenously identifies regimes based on thresholds of macroeconomic variables. Using data from 1986 to 2023, we find robust evidence of regime switches in the currency risk-return relationship, with U.S. inflation and interest rates emerging as crucial variables delineating three regimes: (i) high inflation, (ii) low inflation and low interest rates, and (iii) low inflation and high interest rates. Our findings highlight the dominant role of the Carry factor across all regimes, with a significant risk premium and high selection probability. In contrast, other factors (e.g., Value and Momentum) vary between regimes. Finally, we introduce a novel regime risk anomaly that yields abnormal returns not explained by common currency factors and links to macroeconomic uncertainty risk.

Bibliographic Details

Guanhao Feng; Jingyu He; Junye Li; Lucio Sarno; Qianshu Zhang

Elsevier BV

Business Cycles; Currency Returns; Panel Tree; Regime Shifts; Risk Premia

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