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on International Finance |
| By: | Menkhoff, Lukas; Sarno, Lucio; Schmeling, Maik; Schrimpf, Andreas |
| Abstract: | We assess the properties of currency value strategies based on real exchange rates. We find that real exchange rates have predictive power for the cross-section of currency excess returns. However, adjusting real exchange rates for key country-specific fundamentals (productivity, the quality of export goods, net foreign assets, and output gaps) better isolates information related to the currency risk premium. In turn, the resulting measure of currency value displays considerably stronger predictive power for currency excess returns. Finally, the predictive information content in our currency value measure is distinct from that embedded in popular currency strategies, such as carry and momentum. |
| Keywords: | Currency value; macro fundamentals; predictability; real exchange rate |
| JEL: | F31 G12 G15 |
| Date: | 2016–06 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:11324&r=ifn |
| By: | HORIE, Tetsushi; YAMAMOTO, Yohei |
| Abstract: | Towards the financial crisis of 2007 to 2008, speculative bubbles prevailed in various financial assets. Whether these bubbles are an economy-wide phenomenon or market-specific events is an important question. This study develops a testing approach to investigate whether the bubbles lie in the common or in the idiosyncratic components of large-dimensional financial panel data sets. To this end, we extend the right-tailed unit root tests to common factor models, benchmarking the panel analysis of nonstationarity in idiosyncratic and common component (PANIC) proposed by Bai and Ng (2004). We find that when the PANIC test is applied to the explosive alternative hypothesis as opposed to the stationary alternative hypothesis, the test for the idiosyncratic component may suffer from the nonmonotonic power problem. In this paper, we newly propose a cross-sectional (CS) approach to disentangle the common and the idiosyncratic components in a relatively short explosive window. This method first estimates the factor loadings in the training sample and then uses them in cross-sectional regressions to extract the common factors in the explosive window. A Monte Carlo simulation shows that the CS approach is robust to the nonmonotonic power problem. We apply this method to 24 exchange rates against the U.S. dollar to identify the currency values that were explosive during the financial crisis period. |
| Keywords: | speculative bubbles, explosive behaviors, factor model, moderate deviations, local asymptotic power, nonmonotonic power |
| JEL: | C12 C38 F31 |
| Date: | 2016–06–17 |
| URL: | http://d.repec.org/n?u=RePEc:hit:econdp:2016-04&r=ifn |