Kremens, Lukas and Martin, Ian ORCID: 0000-0001-8373-5317 (2019) The quanto theory of exchange rates. American Economic Review, 109 (3). pp. 810-843. ISSN 0002-8282
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Abstract
We present a new identity that relates expected exchange rate appreciation to a risk-neutral covariance term, and use it to motivate a currency forecasting variable based on the prices of quanto index contracts. We show via panel regressions that the quanto forecast variable is an economically and statistically significant predictor of currency appreciation and of excess returns on currency trades. Out of sample, the quanto variable outperforms predictions based on uncovered interest parity, on purchasing power parity, and on a random walk as a forecaster of differential (dollar-neutral) currency appreciation.
Item Type: | Article |
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Additional Information: | © 2018 American Economic Association |
Divisions: | Finance |
Subjects: | H Social Sciences > HB Economic Theory H Social Sciences > HG Finance |
JEL classification: | 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 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 |
Date Deposited: | 13 Aug 2018 15:27 |
Last Modified: | 01 Oct 2024 03:28 |
Projects: | 639744 |
Funders: | European Research Council |
URI: | http://eprints.lse.ac.uk/id/eprint/89839 |
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