The quanto theory of exchange rates

Kremens, Lukas and Martin, Ian ORCID: 0000-0001-8373-5317 (2017) The quanto theory of exchange rates. Systemic Risk Centre Discussion Papers (75). Systemic Risk Centre, The London School of Economics and Political Science, London, UK.

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Abstract

We present a new, theoretically motivated, forecasting variable for exchange rates that is based on the prices of quanto index contracts, and show via panel regressions that the quanto forecast variable is a statistically and economically significant predictor of currency appreciation and of excess returns on currency trades. We also test the quanto variable's ability to forecast differential currency appreciation out of sample, and find that it outperforms predictions based on uncovered interest parity, on purchasing power parity, and on a random walk.

Item Type:	Monograph (Discussion Paper)
Official URL:	https://www.systemicrisk.ac.uk/
Additional Information:	© 2017 The Authors
Divisions:	Finance
Subjects:	H Social Sciences > HC Economic History and Conditions H Social Sciences > HG Finance
JEL classification:	G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing; Trading volume; Bond Interest Rates G - Financial Economics > G1 - General Financial Markets > G15 - International Financial Markets F - International Economics > F3 - International Finance > F31 - Foreign Exchange F - International Economics > F3 - International Finance > F37 - International Finance Forecasting and Simulation F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F47 - Forecasting and Simulation
Date Deposited:	31 May 2023 13:45
Last Modified:	11 Dec 2024 19:45
URI:	http://eprints.lse.ac.uk/id/eprint/118945

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