Exchange rates and monetary policy uncertainty

Mueller, Philippe, Tahbaz-Salehi, Alireza and Vedolin, Andrea (2016) Exchange rates and monetary policy uncertainty. Discussion Paper Series, 54. London School of Economics and Political Science, Systemic Risk Centre, London, UK.

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Abstract

We document that a trading strategy that is short the U.S. dollar and long other currencies exhibits significantly larger excess returns on days with scheduled Federal Open Market Committee (FOMC) announcements. We also show that these excess returns (i) are higher for currencies with higher interest rate differentials vis-à-vis the U.S.; (ii) increase with uncertainty about monetary policy; and (iii) intensify when the Federal Reserve adopts a policy of monetary easing. We interpret these excess returns as a compensation for monetary policy uncertainty within a parsimonious model of constrained financiers who intermediate global demand for currencies.

Item Type:	Monograph (Discussion Paper)
Official URL:	http://www.systemicrisk.ac.uk/
Additional Information:	© 2016 The Authors
Library of Congress subject classification:	H Social Sciences > HB Economic Theory H Social Sciences > HG Finance
Sets:	Research centres and groups > Systemic Risk Centre
Identification Number:	54
Project and Funder Information:	Project ID Funder Name Funder ID ES/K002309/1 Economic and Social Research Council http://dx.doi.org/10.13039/501100000269
Date Deposited:	12 Apr 2016 10:42
URL:	http://eprints.lse.ac.uk/66043/

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